Annual
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SunTrust Banks, Inc. is one of the nation’s largest and strongest financial services companies, with total assets of $206 billion and
total deposits of $161 billion as of December 31, 2017. Most importantly, we are an organization driven by purpose and a personal
touch. We are passionate about Lighting the Way to Financial Well-Being. Helping instill a sense of confidence in the financial
circumstances of clients, communities, teammates and shareholders is at the center of everything we do.
We deliver a full suite of products and financial services designed to help serve the needs of our consumer, business, corporate
and institutional clients. Our businesses are organized into two segments: Consumer, which includes Consumer Banking,
Consumer Lending, Private Wealth Management and Mortgage; and Wholesale, which includes Corporate and Investment
Banking, Commercial and Business Banking, Commercial Real Estate, and Treasury and Payment Solutions.
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(Dollars in millions and shares in thousands, except per share data)
Year ended December 31
For the Year
Net income
Net income available to common shareholders
Total revenue
Total revenue — full-time equivalent (FTE)1,2
Noninterest expense
Per Common Share
Net income — diluted
Dividends declared
Common stock closing price
Book value
Tangible book value1
Financial Ratios
Return on average total assets
Return on average common shareholders’ equity
Return on average tangible common shareholders’ equity1
Net interest margin
Net interest margin — FTE1,2
Efficiency ratio
Tangible efficiency ratio — FTE1,2
Adjusted tangible efficiency ratio — FTE1,2
CET1 (Basel III)
At December 31
Total assets
Loans
Deposits
Total shareholders’ equity
Common shares outstanding
Full-time equivalent employees
2017
$2,273
2,179
8,987
9,132
5,764
$4.47
1.32
64.59
47.94
34.82
1.11%
9.72
13.39
3.06
3.14
64.14
62.30
61.04
9.74
2016
$1,878
1,811
8,604
8,742
5,468
$3.60
1.00
54.85
45.38
32.95
0.94%
7.97
10.91
2.92
3.00
63.55
61.99
61.99
9.59
2015
$1,933
1,863
8,032
8,174
5,160
$3.58
0.92
42.84
43.45
31.45
1.02%
8.46
11.75
2.82
2.91
64.24
62.64
62.64
9.96
$205,962
143,181
160,780
25,154
470,931
23,785
$204,875
143,298
160,398
23,618
491,188
24,375
$190,817
136,442
149,830
23,437
508,712
24,043
1 See reconciliation of non-U.S. GAAP measures in Table 30, “Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures,” in the MD&A section (Item 7) of the Company’s 2017 Annual Report on Form 10-K.
2 The Company presents Total revenue — FTE, Net interest margin — FTE, Tangible efficiency ratio — FTE and Adjusted tangible efficiency ratio — FTE on a fully taxable-equivalent (FTE) basis. The FTE basis adjusts for the
tax-favored status of net interest income from certain loans and investments using a federal tax rate of 35% and state income taxes, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis. The
Company believes the FTE basis is the preferred industry measurement basis for these measures and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. Total revenue — FTE is
calculated as Net interest income — FTE plus noninterest income. Net interest margin — FTE is calculated by dividing annualized net interest income — FTE by average total earning assets.
7Confidence
Starts Here
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TO MY FELLOW OWNERS,
I have been chairman & CEO since 2011, and for each of the past six
years, we have been able to deliver good news about the progress
we’re making as a Company, our performance, and most importantly,
the value we’ve delivered to you, our owners. In fact, if you’ve been
an owner of the Company for the last six years, the cumulative return
on your investment is 306%, and better yet, we’ve outperformed our
peer group in five of those six years. But even if you just became an
owner in 2017, you still benefited from our outperformance—our total
shareholder return (TSR) was 20% (approximately 700 basis points
higher than the median of our peer group).
WILLIAM H. ROGERS, JR.
Chairman & Chief Executive Officer
SunTrust Banks, Inc.
SunTrust is where I’ve been for my entire
career, and we’ve gone through some
challenging times as a Company. When
I became CEO in June of 2011, we were
digging out of the Great Recession and
saw many banks around us fail to survive.
It was a particularly traumatic time in the
history of our country.
Despite this, our team understood the
underlying potential of this great Company
and was committed to turning the tide. We
developed three primary strategies of
(1) growing and deepening client
relationships; (2) improving efficiency;
and (3) optimizing the balance sheet to
enhance returns. Since then, our strategic
focus has been consistent, which also
helped our execution against these
strategies—we learn from our mistakes,
we course correct and we continue to
progress toward our ultimate goal of being
America’s best financial services company.
Total Shareholder Return1
SUNTRUST
PEER MEDIAN2
2012
2013
2014
2015
2016
2017
Cumulative
Return
61%
31%
16%
5%
31%
20%
306%
22%
37%
9%
(2)%
30%
13%
183%
As I reflect upon our journey since then, I cannot
help but be incredibly proud of what we have
accomplished. For each of the past six years,
we’ve grown the earnings of the Company,
we’ve improved our efficiency and we’ve been
able to increase our capital returns to owners (all
of which has resulted in the shareholder returns
you see in the table above).
Our improved financial performance is
not the only measure of our success.
We fundamentally believe purpose and
performance are inextricably linked,
and I am equally proud of the way that
we’ve evolved into a purpose-oriented
Company.
Today, our purpose of Lighting the Way
to Financial Well-Being for our clients,
teammates and communities is truly the
heartbeat of the Company—it is at the
center of everything we do. This purpose
was the catalyst for the onUp Movement,
which we launched in 2016 to help all
Americans move from financial stress to
financial confidence. I’ll touch more on our
purpose later, but if you haven’t already
done so, please visit onUp.com (and
better yet, take The onUp Challenge!).
1Source: Bloomberg. Dividends assumed to be reinvested in security.
2Peer group in 2017 was BAC, BBT, CFG, FITB, HBAN, KEY, MTB, PNC, RF, USB, WFC. Peer group from 2012–2016 was BBT, CMA, COF, FITB, KEY, MTB, PNC,
RF, USB, WFC. Cumulative return based on current peer group.
3
We fundamentally believe purpose and performance are
inextricably linked, and I am proud of the way that we’ve
evolved into a purpose-oriented Company.
INVESTMENT THESIS
we evolve and adapt to changing client
the size and locations of our branch
preferences (particularly in an increasingly
network while also modernizing our
I meet with many of our owners
digital world), maintain our competitive
remaining branches and ensuring they are
throughout the year, and while discussion
advantage (including in differentiated
staffed with talented professionals. We
topics and questions evolve over time,
businesses like SunTrust Robinson
then deploy the savings from our branch
what has not changed is their core
Humphrey and LightStream) and better
network (which is down by 24% over the
investment thesis in SunTrust. Our
diversify our revenue mix. Even going
last six years) into our digital capabilities,
owners have invested in SunTrust for
back to the Great Recession, we remained
with increased emphasis on our mobile
three primary reasons: (1) we have a
disciplined around investing in growth
capabilities. Take a look at pages 12-13
strong and diverse franchise and are
to position the Company for long-
of the report and you’ll see some of the
focused on investing in growth; (2)
term success. This strategy has yielded
key features we added in 2017, including
we have demonstrated success in
positive results and was a key contributor
enhanced payment capabilities through
improving our efficiency and returns
to the solid 4% revenue growth we
the Zelle® network, in addition to a sneak
but have potential for significant future
delivered in 2017.
preview of what’s to come in 2018.
improvements; and (3) we have a strong
capital position, particularly in the
Today more than ever, we must invest in
context of our lower relative risk profile,
new technologies, focus on innovation
which has enabled us to return increasing
and ensure that we remain agile. As a
amounts of capital back to our owners.
Company, we are making significant
investments in technology, and I have
Our financial performance has directly
no doubt this will continue to be one
supported this investment thesis.
of the largest, if not the largest, area of
As you saw, 2017 marked our sixth
investment for the Company over the
consecutive year of higher earnings per
medium term.
share, improved efficiency and higher
capital returns. In addition to those,
The world of traditional branch banking
Adjusted Earnings
Per Share3
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4 $
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there’s much more that we accomplished
is changing at a rapid pace. Our clients
At a high level, our digital strategy within
in 2017.
don’t need to have a branch right around
Consumer is to meet our clients where
STRONG & DIVERSE
FRANCHISE; INVESTING
IN GROWTH
the corner anymore, but they do need
they are. We serve them when, where and
to have a mobile app that is easy to
how they choose, and make banking easy
use and can fulfill the majority of the
for them. Our Mobile App and broader
tasks that once required a trip to the
digital platform (mobile, tablet, online)
branch. Branches still play a meaningful
should be our clients’ financial home—
Our strategy and investment thesis have
role—45% of our clients come into a
their one-stop shop for understanding
been consistent, but that’s not to say we
branch each month; at the same time,
and managing their finances, which
aren’t constantly evolving as a Company.
our mobile sign-ons were up 20% in 2017.
ultimately supports our purpose of
We have been and will continue to make
For this reason, our approach is balanced.
enabling financial confidence.
investments in growth to ensure that
We will continue to thoughtfully optimize
32012, 2013, 2014 and 2017 values represent adjusted earnings per share. The impact of excluding discrete items was ($1.40), $0.33, $0.01 and ($0.39) for 2012,
2013, 2014 and 2017, respectively.
4
In the same way that traditional branch
the first banks to partner with GreenSky,
the wealth-management needs of clients
banking is changing, so is the world of
and it has been a great partnership thus
across the spectrum.
consumer lending. Clients don’t want to
far—plus there is potential for more.
go into a branch, fill out a lot of paperwork
Our Consumer leadership team spent
for their loan application and then have
The final piece of consumer lending is
a significant part of 2017 integrating
to wait weeks to get the results. When
mortgage, and frankly, our mortgage
the Mortgage business into Consumer
it comes to lending, clients want three
application process is not nearly as
and “wiring” the entire ecosystem
things: (1) simplicity; (2) speed; and (3)
user-friendly as LightStream and
appropriately so that the right teammate
privacy. Through LightStream, our online
GreenSky (in part due to heightened
is delivering the right solution at the right
lending platform, we provide just that.
regulatory expectations for mortgage
time. We have a great team in place; we
LightStream provides funding for the
lending). So this is an area where we’ve
have a clear strategy; we are in the right
majority of consumer purchases: cars,
made significant investments. In 2016,
consumer businesses; and we are in some
boats, weddings, home improvement
we introduced a new back-end loan
of the highest growth markets in the
projects, debt consolidation, medical
origination system, and in 2018, we’ll
country (many of which will benefit from
bills and so much more. Better yet, the
be rolling out a new, fully digitized
tax reform). All in all, Consumer is a great
application takes the average client less
front-end mortgage application which
business today, and I’m confident it will
than 20 minutes to complete, and in
will significantly improve the
be even better in the years to come.
many cases we are able to provide same-
client experience.
day funding. This platform, which we
Our other business segment, Wholesale,
acquired in 2012, has been a key area
While technology has been a key area
is broken into three primary lines of
of investment for the Company. We
of investment in Consumer, we’re also
business: Corporate and Investment
strongly believe we have a head start in
investing in our talent. Specifically,
Banking (also known as SunTrust
this space, but we must make consistent
we’ve made significant investments
Robinson Humphrey, or STRH),
investments to keep up with the pace of
in our wealth management business—
Commercial Banking and Commercial
innovation and fully capitalize upon the
hiring new advisors, training our
Real Estate. This segment has an
competitive advantage that LightStream
existing advisors and even expanding
undeniable competitive advantage—
provides. We’re also gaining great national
into new markets. In 2017, we added
we bring big-bank capabilities to
recognition for this platform. In December,
U.S. News & World Report named
LightStream one of the Best Personal
approximately 130 new advisors, some
middle-market clients in a team-oriented
of whom are in our new offices in Dallas,
manner. Said differently, we’re a big
Houston and New York City. We also
bank with a boutique feel. The numbers
Loan Companies of 2017.
introduced a new RESERVE segment,
speak for themselves—we’re gaining
which provides a truly differentiated
market share and growing this business
In addition to LightStream, we also have
service to clients with $5–$25 million of
at an impressive rate. In fact, in 2017,
a partnership with GreenSky, which
managed assets. This is an attractive
investment banking income was up 21%
provides point-of-sale financing for
value proposition for our clients, and
and delivered record performance for
home improvement projects. GreenSky
we added more than 200 clients to
the 10th consecutive year. STRH also
works with home improvement providers
the RESERVE segment in 2017. Wealth
received some notable awards this year,
(contractors or corporations) and
management has always been a key
including the recognition of M&A Middle
provides an easy-to-use platform and
business for us, and in this highly
Markets Investment Bank of the Year by
process to apply for financing. A key part
competitive industry, we want to ensure
Atlas Awards.
of the model is the funding—and that’s
that we have the right team, the right
where we come in. SunTrust was one of
technology and the right model to serve
2017 marked our sixth consecutive year of higher earnings per share,
improved efficiency and higher capital returns.
5
In 2017 alone, we removed another 100 basis points from our
adjusted tangible efficiency ratio, improving it to 61%.
I mentioned earlier that we’ve been very
either came directly from STRH or have
and has enhanced payments and liquidity
disciplined about investing for growth
a background in investment banking.
management tools and capabilities. There
regardless of the economic environment.
Next, we worked hard to train our existing
is more work to be done, but this was
STRH is a prime example of this—we were
bankers on how to best cover their clients.
an important first step. We’re working
actively growing a capital markets business
We taught them how to partner with the
on improving our real-time payments
and hiring talented teammates in 2006–
industry and corporate finance experts to
capabilities for corporate clients and
2009, right in the middle of the Great
tailor solutions for our clients. While it has
advancing their mobile options as well.
Recession. Because of that commitment,
only been a few years, the early results
we have created what we believe is
are very encouraging. When we are able
Overall, Wholesale had a great year in
the leading middle-market corporate
to bring product and industry expertise to
2017, delivering record revenue and net
and investment bank. In addition, our
our clients, we grow the average revenue
income, in addition to improved efficiency.
leadership team has been stable, and
per client by eight times (where these
More importantly, this business has a
collectively, they have an average of 11
capabilities are applicable).
significant runway for growth. We have a
years at SunTrust.
great team in place, we have the full set of
Until 2017, our Commercial Banking
capital markets capabilities and we have
STRH is a great business, and it’s been
business focused on covering clients in
a proven competitive advantage. We will
in a steady growth mode for a long
markets where we have a branch banking
continue to invest in our talent, products
time now. I am confident this growth
presence. However, many commercial
and technology to ensure our Wholesale
will sustain as we continue to deepen
clients do not need a branch, and given
segment can realize its full potential.
relationships with existing clients and
the competitive advantage we were
acquire new clients. But there’s a second,
creating, we asked ourselves an
The investments we’ve made in growth
more recent leg of our growth strategy—
appropriate question: Why is Commercial
across the Company have greatly
bring the product and industry expertise,
Banking only in the Southeast and Mid-
diversified both our revenue mix and our
the coverage model (which we call the
Atlantic? There was no longer a good
balance sheet. We benefited from this
OneTeam Approach®) and the discipline
answer to this question, and thus we
diversity in 2017 in a couple of ways. First,
from STRH and export this into our
opened three new commercial banking
mortgage revenues declined significantly
Commercial Banking and Commercial Real
offices in Texas and Ohio. Even though
as refinancing volumes were down given
Estate businesses. We’re effectively taking
we’ve only been in these new markets for
the rise in interest rates. However, we were
the STRH playbook and bringing it to the
a few months, we’ve already generated
still able to deliver 4% revenue growth
rest of Wholesale to meet more of our
new business, and I’m confident this
due to growth from other areas, including
clients’ needs beyond traditional lending
expansion will be a contributor to
investment banking and traditional net
and deposit solutions.
Wholesale’s growth going forward.
interest income (which benefits from
rising rates). Secondly, within a matter of
We started on this journey back in 2014
As with Consumer, investments in
weeks, Hurricane Harvey and Hurricane
by creating industry-specialty groups
technology are also a key area of
Irma came through our markets, causing
that are most relevant to clients in our
focus in Wholesale. Our treasury and
significant damage throughout Texas and
markets (ports and logistics, aging services
payments capabilities are key to our
the Southeast. While we expect to incur
and not-for-profit healthcare are just a few
future success. We have a new online
some losses (for which we’ve already
examples). We also put the right leadership
treasury management platform, SunView,
reserved), this only had a modest impact
team in place. The vast majority of our
which we introduced in 2017. SunView
to our financial performance. Ten years
market presidents in Commercial Banking
provides an improved client experience
ago, at a time when we were much more
6
concentrated in Florida and Georgia, with
There are a few key actions we took in
introduced new loan-origination systems
a different risk profile, it wouldn’t have
2017 in connection with our efficiency
in Commercial Banking and Mortgage. In
been as good of a story. All in all, our
objectives. In February, we decided to
doing so, we’ve significantly modernized
intentional focus on investing in growth
consolidate our mortgage business, which
our loan-origination process and ultimately
while also ensuring we have adequate
historically had been a separate segment,
improved loan-cycle origination times.
diversity has significantly reduced our
into Consumer. This provides us with
Importantly, these core systems are also
earnings volatility, further benefiting our
opportunities to streamline operations and
cloud-based, thereby improving our agility
clients and owners.
creates greater alignment among all the
and efficiency. And finally, we continue to
IMPROVING EFFICIENCY
& RETURNS
consumer-facing channels. We also created
invest in self-service channels like mobile,
an Efficiency Office, and this team’s work
which lowers our overall cost to serve and
has enabled a heightened focus and rigor
makes it easier for clients to complete
around driving and sustaining efficiency in
routine transactions.
As you can see, we have a number of
order to position the Company for long-
growth initiatives across the Company
term growth and success. Additionally, we
Third, we continue to look for opportunities
and have been disciplined about making
took several charges in the second half
to reduce our real estate footprint, both
consistent long-term investments. The
of 2017, which accelerated our progress
in the branches and in our corporate and
goal has been and continues to be that
against certain efficiency initiatives.
operations centers. We’ve taken out about
we remove less productive expenses
a fourth of our branch network over the
and redeploy them into client-focused
At a high level, there are four primary areas
last six years, and we’ve also significantly
opportunities (though that is always easier
where we have the most opportunity to
reduced our corporate workspace. Over the
said than done).
improve efficiency.
past year, we removed 674,000 square
feet, and over the past six years, we have
In 2011, our efficiency ratio was 72% and
First, we continue to optimize our human
taken out 3.4 million square feet from
we set a goal of improving it to be below
capital. We are very focused on right-
our real estate footprint (about 30%) and
60%. Over the past six years, we’ve made
sizing the chassis of the organization to
expect further reductions in the next few
significant progress toward this goal
ensure our businesses are appropriately
years—good for our owners and good for
(which we now expect to achieve by 2019).
staffed. We went through a significant
sustainability.
In 2017 alone, we removed another 100
organizational design process in 2017 and
basis points from our adjusted tangible
executed both a severance and a voluntary
And finally, we remain focused on managing
efficiency ratio, improving it to 61%.
retirement program to manage our staffing
our supplier relationships. We are not just
%
5
.
1
7
Adjusted Tangible
Efficiency Ratio4
model. At the same time, we continue
working to maximize our internal resources—
to make investments in our organization
we also want to maximize our external
by training our existing teammates and
resources. We have and will continue to
%
9
6
6
.
%
3
5
6
.
%
3
3
6
.
%
6
2
6
.
%
0
2
6
.
%
0
.
1
6
bringing in new talent.
look for opportunities to optimize vendors,
renegotiate contracts and bring services
Second, we are leveraging the investments
in-house when appropriate.
we’ve made in technology. We are
making significant investments in various
Now, more than ever, there is a culture of
forms of automation (robotics, artificial
continuous improvement ingrained within
intelligence, machine learning, better end-
our organization. It is this discipline, this
to-end processes) which improves our
emphasis on executional excellence and
effectiveness and allows our teammates
this heightened set of expectations which
to focus on higher value-added work.
will enable us to realize our long-term
’11
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Additionally, over the past two years, we
profitability potential.
42012, 2013, 2014 and 2017 values represent the adjusted efficiency ratio and adjusted tangible efficiency ratio. Adjusted figures are intended to provide
management and investors information on trends that are more comparable across periods and potentially more comparable across institutions.
7
INCREASED CAPITAL
RETURNS TO OWNERS
I am a strong believer in the CCAR process
Experience. The onUp Experience is a space
and the regulatory requirements related
that we designed specifically for SunTrust
to capital. Today, the industry is in a much
Park, which uses fun and interactive
As owners, I am sure you will agree
better position to absorb losses and
baseball-themed games to engage with
with me that one of our biggest
withstand a significant economic downturn.
fans and encourage them to learn more
accomplishments in 2017 was the 54%
I am also a strong believer that capital, on
about gaining financial confidence.
increase in the dividend and 38% increase
a fundamental basis, exists to support risk.
in our share buyback program. This was
Therefore, a bank’s capital profile should be
In 2017, as an extension of onUp, we
the sixth consecutive year in which we’ve
commensurate to its risk profile. Given this,
launched Momentum onUp®, which aims to
increased our capital returns, and we
we think we can reduce our fully phased-in
help companies equip their employees with
brought our total payout ratio up to 89%
Basel III Common Equity Tier 1 ratio from
the tools for financial success. This actually
for the 2017 calendar year.
9.6% to between 8-9% over the next couple
began as a program for our own teammates
What’s equally encouraging is that we
continue to perform very well in the
Federal Reserve’s stress test. Relative to
of years.
OUR PURPOSE
in 2015. We felt it was so successful for us
that we decided to offer the program to
our corporate clients and their employees
(at no profit to SunTrust). We already have
our peers, we consistently have among
I said earlier in this letter that our purpose is
more than 70 companies signed up, and
the lowest loss rates, which is further
at the center of all that we do. We are
more than 30,000 of their employees have
validation of our underwriting discipline
passionate about promoting financial
completed the program. The feedback has
and portfolio diversity. I talked earlier
well-being for our clients, communities
been tremendous—99.5% of participants
about our emphasis on having a diverse
and teammates. There is no denying that
tell us they would recommend Momentum
balance sheet and business mix, which
financial stress takes a huge toll on so many
onUp to others.
not only allows us to deliver consistent
people—it is a burden on their relationships,
results, but is also a key contributor to our
it keeps them from being as productive at
There’s much more that we accomplished
strong performance in CCAR. In fact, the
work and it ultimately prevents them from
related to our purpose in 2017, specifically
standard deviation of our CCAR loss rates
fully enjoying the moments that matter. It
the work we’ve done in our communities to
is just five basis points, which is by far the
is our fundamental belief that banks have a
build financial confidence, but I’d encourage
lowest among our peers. This ultimately
tremendous opportunity and responsibility
you to read more on pages 16–37.
allows us to more fully leverage your
to promote and enable financial confidence.
capital investment in us.
Total Payout Ratio
%
3
7
%
2
6
%
8
4
%
6
2
%
% 1
8
1
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IN CONCLUSION
It is because of this belief that we launched
onUp in 2016. This is a movement we
To conclude, I want to comment on the
%
9
8
began to help people start the conversation
broader momentum that America has right
about money and take steps toward
now. There are certainly skeptics out there
increasing financial confidence. We built
who feel that we are due for a downturn,
a valuable resource center at onUp.com
and while they do have valid points, I am
and we continue to add new tools, articles
personally encouraged by the underlying
and calculators for anyone’s use—not just
strength of the economy, and I believe it
SunTrust clients. In March, we celebrated the
can sustain. We are in the eighth year of
grand opening of SunTrust Park, the new
economic expansion, and while that is
home of the Atlanta Braves. SunTrust Park
longer than the average expansionary period,
is not just a ballpark—it is an impressive
our rate of improvement has been slower
mixed-use development with restaurants,
than average—and I believe this country has
retail, office space and the new The onUp
more runway.
8
If you just isolate tax reform in itself, this is
encouraging to see our net interest margin
representing the interests of our clients,
a very positive tailwind for the economy.
improve by 14 basis points in 2017, and the
owners and teammates throughout their
Not only are we boosting the earnings
upward trajectory should continue in 2018
tenures here. One of our Company’s
power of corporations and creating more
(though likely not at the same pace as the
strengths is the depth and breadth of
capacity for investments, but we’re also
prior two years).
encouraging many companies to bring
our team, and our succession planning
and leadership development process,
more of their business back to the U.S.
All in all, this is an exciting time for the
which will help us build upon these
I truly believe that tax reform will serve as a
American economy and a particularly
leaders’ success.
catalyst for increased capital expenditures.
exciting time for our industry. For
This is where I think many companies
SunTrust specifically, we are poised to see
I also want to thank our teammates for
have been holding back—they haven’t
outsized benefits from economic growth
all that you accomplished in 2017—it is
had the confidence to make incremental
and tax reform given our market position
because of your passion for promoting
investments in their business. Instead,
in the high-growth Southeast and
financial confidence, helping our clients
most have focused on paying down debt
Mid-Atlantic markets, the many organic
achieve smart growth and providing for a
and repurchasing shares. We’ve seen it in
growth initiatives across the Company
superior client experience that we are on
our corporate lending activity; paydowns
and finally, our culture of continuous
our way to becoming the best American
were elevated and production was down
improvement across the organization.
financial services company. We collectively
in 2017, which resulted in below-average
continue to raise the bar, and you continue
corporate loan growth.
To conclude, I want to thank some key
to rise to the occasion. Together, we are
leaders in the Company. Anil Cheriyan, our
making a difference in the lives of our
The improving rate environment provides
Chief Information Officer; Ray Fortin, our
clients, communities and owners.
another positive backdrop for the banking
General Counsel and Corporate Secretary;
industry. The Federal Reserve has begun
Tom Freeman, our Efficiency & Strategic
And finally, thank you to our Board of
normalizing interest rates, which has
Partnerships Executive; and Aleem Gillani,
Directors. Your dedication, wisdom,
helped reverse the trend of abnormally
our Chief Financial Officer, are retiring this
experience and expertise has been
low levels of net interest margins for the
year. Together they have nearly 60 years
and will continue to be instrumental in
industry. While our net interest margins
at SunTrust, and I thank each of them
strengthening our financial performance
may not return to pre-crisis levels, it was
for their dedication and commitment to
and long-term potential.
2017 was a great year for SunTrust, and 2018 has the potential to be significantly better.
Thank you for your ownership in SunTrust. As stewards of your capital, we are committed to
continuing to generate value for you.
WILLIAM H. ROGERS, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SUNTRUST BANKS, INC.
FEBRUARY 16, 2018
9
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Impact In
2017
Another way we live our purpose is through our
commitment to conducting business in a way that is
socially and environmentally responsible. A steering group
of SunTrust teammates is helping us explore more ways
to foster sustainable communities and enhance our focus
on corporate social responsibility, including corporate
governance and more comprehensive reporting. Here are
just a few ways we were able to make an impact in 2017.
10
2.5MORE TH AN
MILLION PA RTICIPA NTS
IN THE onUp MOVEMENT
221,600
TEAMMATE
VOLUNTEER HOURS
$274
MILLION IN M ORTGAG E
LOANS TO VETERANS
WE H E LPE D M O R E TH A N
17,000
LOW- TO MODE R ATE-INCOME
H O USE H O LDS
QUALIFY FOR A MORTGAGE
$16.9
MILLION IN CONTRIBUTIONS TO
NONPROFITS AND COMMUNITY
ORGANIZATIONS
APPROXIM ATE LY
3,500
TE AMM ATES PA RTICIPATE
IN EIGHT INCLUSION
NETWORKS
1,500
ACRES OF TREES PL ANTE D
BY LIG HTSTRE AM ,
ONE TREE FOR
EVERY NEW LOAN
11
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The Client
Experience
Investing in our digital platforms and client-friendly technology remains central to our
strategy to make banking easier for clients and to support their financial well-being.
ENHANCING OUR MOBILE FUNCTIONALITY
We’re focused on adding mobile capabilities to the Mobile App that make it easier for clients to achieve
financial confidence. In 2017, we added a few key features:
PERSON-TO-PERSON
PAYMENTS
A simple and secure way to send
or request money using only a
phone number or email address,
with Zelle
BETTER CARD
SECURITY
Quickly lock and unlock your
credit card through our
Mobile App, reducing
fraud risk
TRACK YOUR
CREDIT SCORE
View your FICO® Score online
or through the Mobile App
SAVINGS AND
REWARDS
Get custom offers based on your
spending history and preferences
with new SunTrust Deals
12
IN 2018, clients will see a noticeable change when
logging onto suntrust.com as we transition to a
new Enterprise Client Portal. This new, flexible
foundation for our digital experiences will provide
clients the following key benefits:
HOLISTIC, TAILORED USER EXPERIENCES
Provides a consolidated relationship view in the SunTrust Online Banking
and Mobile Banking experiences
INTEGRATED PLANNING TOOLS
Enables clients to establish a plan, set goals and track progress while also
providing valuable financial well-being resources
EASE OF USE
An intuitive and simple user experience based on industry-leading API and
cloud technology
ACCESSIBILITY
A consistent user experience on any device or screen size, using responsive design
13
Our
Progress
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Our awards are a reflection of what we value most: making a difference
in the lives of our clients, communities and teammates. Of all of our
accomplishments, we take great pride in providing the best possible
client experience and giving back to those we are privileged to serve.
14
SUNTRUST WAS PROUD TO BE
RECOGNIZED IN 2017 BY:
GLO BAL FINA NCE MAGA Z IN E
Best Bank in the Southeast
Best U.S. Regional Middle Market
Treasury & Cash Management Provider
G RE E NWICH A SSOCIATES
5 Excellence Awards and 4 Best Brand
Awards for small business banking
3 Best Brand Awards for
middle market banking
Excellence Award for Overall Satisfaction
in Wealth Management and Personal
Investment Services
JAV E LIN
Online Banking Award
SUNTRUST WAS HONORED
FOR ITS CORPORATE SOCIAL
RESPONSIBILITY IN 2017 BY:
THE WOMEN’ S FORUM OF NE W YORK
2017 Corporate Champion for Board Diversity
FINANCIAL SERV ICES ROUNDTABLE
Corporate Social Responsibility Leadership Award
THE PRES IDE NT’ S VOLUNTE E R
SERV ICE AWARD
Third-time recipient of the Advancing
Financial Literacy Award for providing more
than 15,000 volunteer hours to Junior
Achievement (JA) during the
2015–2016 school year
LIGHTSTREAM WAS
HONORED BY:
SUNTRUST ROBINSON HUMPHREY
WAS RECOGNIZED BY:
U. S . NE WS & WORLD REPORT
2017 Top Lender for Very Good Credit, Low
APR and No Origination Fees
Best Personal Loan Company
LE NDING TRE E
Top 3 in Customer Satisfaction in
Auto Financing, Q3
MERG ER & ACQU ISITION
ATL A S AWARDS
USA Outstanding M&A Middle Markets
Investment Bank of the Year
USA M&A Large Deal of the Year Award
Americas Telecom M&A Deal of the Year Award
Gold Standard of Performance
15
Fewer than 1 in 4 Americans rate
their financial confidence as high.
SunTrust is here to help.
onUp UPDATES 16
G
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The onUp
Movement
The onUp Movement is the manifestation of everything that drives us. It makes
our purpose of Lighting the Way to Financial Well-Being tangible, and in its
second year, the movement has helped more than 2.5 million participants gain
confidence in their finances.
INSPIRING FINANCIAL CONFIDENCE
Our research1 shows that Americans at all income
levels can improve their financial confidence.
• Fewer than 1 in 4 Americans rate their
financial confidence as high
• 8 out of 10: How people with high financial
confidence rate their happiness
• 4 out of 10: How people with very low
financial confidence rate their happiness
UNDERSTANDING FINANCIAL
BEHAVIORS
• 37% of Americans feel like they are living
paycheck to paycheck
• About one-third of people spend according
KNOWING OUR PURPOSE IS A
COMPETITIVE ADVANTAGE
SunTrust is in a position to help Americans gain
control of their finances and take positive steps
forward to reach their goals. From our Wholesale
relationship managers to Private Wealth Management
advisors, to bankers in branches and corporate
functions teammates, everyone understands that
providing each client with the right knowledge and
support they need to achieve financial well-being is
our No. 1 goal. That’s what the onUp Movement is all
about—and what sets us apart from other banks.
to a formal budget
18SUN_10846129_2018 Annual Report AD: Ally Hill • BL: Megan Griswold
DIGITAL VERSION
• About 50% of Americans don’t have $2,000
final size: 8.25" x 10.75"
scale: 100%
•
on hand for emergencies
19% of Americans who are employed full-time
do not have any retirement savings
Release Date: 2/16/2018
Notes: Prints 4/C
x
Original Artwork
1The quarterly SunTrust Financial Confidence Poll is conducted online using a nationally representative sample of 2,500 adults. The
survey was collected from December 14–22 for Q4 2017.
onUp UPDATES
17
onUp UPDATES 18
G
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Confidence
With SunTrust
Through our extensive research, we know that a great majority of Americans experience
financial stress. That’s why SunTrust is committed to being a part of the solution. The
onUp Movement is our call to action, providing inspiration, education and resources to
help everyone take a step in the right financial direction.
BRINGING THE onUp EXPERIENCE TO
SUNTRUST PARK
TAKING onUp ON THE ROAD
Building on the momentum of the onUp Movement,
onUp on tour traveled to more than 45 cities throughout
the Southeast and Mid-Atlantic region to thank teammates,
celebrate the onUp Movement and encourage even more
people to take control of their finances.
Traveled to communities from June through October 2017
Completed 65 stops across SunTrust markets
•
•
• Reached nearly 30,000 people
Our partnership with the Atlanta Braves is more than a
naming rights sponsorship. SunTrust Park allows us to
connect with people where they live, work and play all year
round at The Battery Atlanta, including millions of baseball
fans from across the country. And through The onUp
Experience at the entrance of SunTrust Park, we’re able to
engage visitors with a range of interactive games and
activities while seeding conversations about building
financial confidence.
MAKING FINANCES FUN AT onUp.com
onUp.com continues to be an online destination for free
financial tips, tools and resources. In 2017, we added
gamification to the lineup. Through The onUp Challenge,
finances are turned into an online gaming adventure,
providing a fun, informative way for players to
make real progress toward their goals.
onUp UPDATES
19
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Communities
D
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NEW SUNTRUST FINANCIAL
CONFIDENCE CENTER HELPS PEOPLE
GAIN FINANCIAL CONFIDENCE
“Living on a fixed income can be a challenge,” says Carla
Lewis. “I wanted to take charge of my finances so my family
wouldn’t have to worry anymore.”
Crosstown Concourse, formerly a historic Sears building
in Memphis, Tennessee, is a 1.5 million square-foot
space that was dormant for more than 20 years. Today,
it’s a revitalized mixed-use development dedicated to
the cultivation of health and well-being for the community.
Crosstown Concourse features retail stores and restaurants;
fitness, health, arts, education and office space; and
270 apartments.
SunTrust Commercial Real Estate led the financing for
the $200 million transformation of the site. Through its
subsidiary, SunTrust Community Capital, the bank also
led a $56 million New Markets Tax Credit transaction and
participated as an investor.
But that isn’t the only contribution SunTrust made to this
community. The bank knew this location would be the ideal
setting for a hub where people could come together to
socialize, collaborate and obtain education and resources to
improve their financial well-being.
That goal led Ms. Lewis to the SunTrust Financial
Confidence Center on its grand opening day in
August 2017. In partnership with Operation HOPE, the
center offers free advice and resources to help people
build financial confidence.
“I’m legally blind, live with my mother, and my daughter
has a learning disability, which requires her to be
homeschooled,” explains Ms. Lewis. “My mother and I
attended a financial workshop at the center and learned
how to create a budget. That’s something we hadn’t done
before.” After completing the workshop, Ms. Lewis and her
mother also signed up for financial counseling.
“The counseling helped tremendously,” says Ms. Lewis.
“The counselors went over all of our finances and
discovered that I could save money on my health insurance.
And with their help, I received a refund on premiums I had
paid. I used that money to open a savings account. And I
now have more affordable insurance.”
Ms. Lewis is on an 18-month credit recovery plan that will
pay off her balances and raise her credit score. She had a
goal to take charge of her finances and is now on her way
to a life well spent.
Image:
The SunTrust Financial
Confidence Center at
Crosstown Concourse
COMMUNITIES 20
COMMUNITIES 21
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Stronger
Together
Linton Allen, a founder of SunBank (a SunTrust
predecessor), once said, “When you build your
community, you build your bank.” Our actions,
grants and investments are all designed to build
financial confidence and enhance our communities.
GROWING THE SUNTRUST FOUNDATION
Since its inception in 2008, the SunTrust Foundation has
provided grants totaling more than $128 million to not-for-profit
organizations across the Southeast and Mid-Atlantic.
Throughout 2017, the Foundation focused on giving in four
strategic financial well-being areas to help put people on
the path to financial confidence:
•
•
•
•
Financial Education
Financial Counseling
Career Readiness and Workforce Development
Small Business and Entrepreneurship
COMMUNITIES 22
2017 SUNTRUST FOUNDATION GIVING
$16.9 million
IN TOTAL G IVING IN 2017
the highest in SunTrust Foundation’s history
$250,000
to help low-income women build small
businesses to create better lives for their families
G R A M E E N A M E R I C A
$700,000
in free financial education, advice and tools
to help families achieve financial stability
CLE ARPOINT’ S HISPANIC CE NTER
FOR FINANCIAL E XCE LLE NCE
$380,000
for Destination Graduation, impacting the
financial and academic future of students at
Seminole State College
HE ART OF FLORIDA UNITED WAY
$540,000
to provide financial specialists, complete a
Financial Planning Toolkit app and host
Special Needs Workshops
AUTISM SPE AKS
$150,000
to expand the nationally recognized “The
Law and Your Community” program to
Baltimore, Richmond and Atlanta
NATIONAL ORGANIZ ATION OF
B L ACK L AW E NFORCE ME NT
E XECUTIVES (N OBLE)
HELPING OUR
COMMUNITIES IN CRISIS
HOSTING THE LIGHTING
THE WAY AWARDS
BRINGING LEADERS
TOGETHER
The SunTrust Foundation is dedicated
to helping our neighbors when natural
disasters strike. Through the American
Red Cross, we donated $50,000 to
pick up the pieces after devastating
tornados hit Southwest Georgia in
February and $600,000 to help
communities affected by Hurricanes
Harvey and Irma quickly get access to
resources, stay safe and rebuild.
Expanding the impact of these awards
into their second year, the SunTrust
Foundation provided grants totaling
$800,000 to 30 nonprofit organizations
that have a specific focus in one or
more of the Foundation’s four strategic
financial well-being areas to allow them
to further their local efforts.
In October 2017, the SunTrust
Foundation hosted a National
Financial Well-Being Summit at
SunTrust Park, convening top thought
leaders from nonprofit organizations
and higher education across the nation
to discuss ways to lead more people
on the path to financial well-being.
COMMUNITIES
23
TOur SunTrust
Community
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SunTrust teammates never shy from Lighting the Way to Financial Well-Being
in tangible ways. Here are just a few ways we were able to give back in 2017.
COMMUNITIES 24
2017 SUNTRUST BANK INVESTMENTS
$50 million
INCREMENTAL CONTRIBUTION TO SUNTRUST FOUNDATION TO SUPPORT
OUR COMMUNITIES’ LONG-TERM FINANCIAL WELL-BEING EFFORTS
$24.4 billion
IN MORTGAGES, HELPING HOMEOWNERS ACHIEVE THEIR DREAMS
$3.8 billion
LOANS AND INVESTMENTS IN
AFFORDABLE HOUSING AND
COMMUNITY DEVELOPMENT
$270 million
IN SMALL BUSINESS
ADMINISTRATION LOANS FUNDED
OPENING OUR FIRST FINANCIAL
CONFIDENCE CENTER
PUTTING AN EMPHASIS
ON GIVING BACK
Ms. Lewis, whose story we shared on page 20, is one of
many who have found confidence in their finances at the
first Financial Confidence Center at the Crosstown Concourse
development opened in Memphis. In partnership with
Operation HOPE, the center offers advice and resources to
help community members build financial confidence. The
center is designed to provide financial literacy information
and classes to the community at no charge, as well as offer
one-on-one counseling on the topics of credit, money
management and small business ownership.
RAISING MILLIONS FOR UNITED WAY
Teammates and retirees raised nearly $6.7 million to help our
neighbors find jobs, overcome obstacles and gain financial
know-how during our annual United Way campaign.
Teammates logged 221,600 hours of volunteer time and
worked with more than 2,800 nonprofit organizations to
complete more than 38,000 community service activities
and give back in ways that support their passions.
SUPPORTING OUR VETERANS
Helping those who served so bravely for our country is
important to us. We increased our veteran hiring by nearly
30 percent. SunTrust also placed three families in
mortgage-free homes in 2017.
COMMUNITIES
25
Our Team’s
Confidence
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“My wife and I were in the midst of a financial heart attack,” says SunTrust teammate
Andre Dyer. They owed $25,000 in credit card debt, and their credit scores were in the
500s. Even worse, they were facing foreclosure on their home.
Despite their financial stress, the couple constantly put on a brave face to shield their two
daughters. “We did an incredible job of keeping them away from the heat, but it took a
toll,” he says. To avoid foreclosure, Andre’s mother loaned him money from her retirement
savings, but she also issued a warning. “She said, ‘I can’t keep doing this,’ and that
statement—oh man, I was in a deep hole. I knew something had to change.”
DIGGING OUT FROM DEBT
His first step was an honest conversation with his wife
and a close friend who could help them develop an action
plan. One thing was clear: Andre needed to shelve his
unpredictable real estate gig in favor of a new career that
offered a steady income. Two months later, he landed a role
at SunTrust.
Andre had a plan for how to spend each dollar before his
first paycheck came in. He used a spreadsheet to track the
couple’s credit cards, bills and loans, and he prioritized how
they’d pay them back.
“As fast as the money came in, it went back out to pay
off our debts,” he says.
The family’s influx of income and spending discipline—
partially learned through the SunTrust financial fitness
program Momentum onUp—allowed the Dyers to make
huge strides. They paid off the majority of their debts.
“After the steps I took through Momentum onUp,
we can finally breathe,” he says. “The constant stress
gave way to financial confidence.” And Andre found that
budgeting became second nature. They celebrated when
they paid off their last credit card and shifted their money
toward savings instead.
Today, the Dyers have a strong nest egg and an emergency
fund to help with the unexpected. They’re also contributing
toward their younger daughter’s college tuition, and Andre’s
proud to say that their older daughter will graduate from
college without any debt to her name.
“Sometimes my wife and I will talk about buying a new car
or remodeling the house, but our conversations are different
than they were a few years ago,” he says. “Now we think:
‘What happens if we encounter an emergency?’ Remodels
and new cars can wait. I never want to feel that stress again,
and it feels good to work for a company whose purpose is
aligned with my values.”
Image:
Andre Dyer,
SunTrust Teammate
COMMUNITIES 26
After the steps I took through Momentum
onUp, we can finally breathe. The constant
stress gave way to financial confidence.
TEAMMATES
27
H
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EMovement
With Teammates
R
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We’re practicing our purpose with our teammates by ensuring they have the tools and
resources they need to continue their own journey toward financial confidence.
BUILDING MOMENTUM onUp FOR
TEAMMATES
Momentum onUp for Teammates is a financial wellness
program that provides a values-based approach to achieving
financial goals, complete with curriculum, videos, calculators
and tools to help.
•
•
16,000+ active teammates participate in
Momentum onUp for Teammates
77% of Momentum onUp for Teammates
participants feel more in control of their finances1
• SunTrust paid out nearly $9 million to more than
12,000 teammates who completed steps in
Momentum onUp for Teammates, to use for their
emergency savings account
SunTrust also provided a series of three Momentum onUp
Boot Camps for Teammates with young adults, children
and aging loved ones. Combined, more than 9,000
teammates participated.
RECOGNIZING PURPOSE AMBASSADORS
Approximately 425 top-performing teammates representing
all levels of the organization serve as our Purpose
Ambassadors. These highly engaged teammates share best
practices and light the way for others—inside and outside
of the bank. They’ve taken our financial fitness program,
Momentum onUp, and are trained to talk about money, share
insights with their colleagues, families and communities, and
spread the onUp Movement.
INVESTING TAX REFORM SAVINGS
To support the financial wellness of our teammates, SunTrust
made the following commitments:
• A minimum wage increase to $15 per hour
•
Increased base pay for certain other nonexempt
teammates, primarily those making between
$15–$20 per hour
• A one-time, one percent of 401(k) eligible wages
will be contributed to retirement savings for all
eligible teammates, in addition to the company’s
6% match opportunity
• A $1,000 financial incentive for all teammates who
complete both phases of SunTrust Momentum
onUp for Teammates, including past graduates
1Based on SunTrust Teammate Financial Well-Being Survey, May 2017.
TEAMMATES 28
TEAMMATES 29
U
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Very Best
P
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SUPPORTING OUR
PHYSICAL WELL-BEING
SunTrust supports the physical well-being of teammates
by providing fitness perks, gym membership discounts,
on-site health clinics, health screenings and a little extra
nudge from partners like RedBrick Health, who provide
top-notch guidance and support. Every year, teammates
get a one-time $50 credit toward an already discounted
Fitbit, and they can purchase up to two more discounted
Fitbit devices for friends or family.
CEO Action for Diversity & InclusionTM, the largest
CEO-driven business commitment to advance diversity
and inclusion within the workplace.
• Approximately 3,500 teammates participate
•
in eight inclusion teammate networks
125 teammates serve as leaders
of inclusion teammate networks
SunTrust remains committed to talent diversity
across all levels.
LEADING INCLUSIVITY
WOMEN
MINORITY
SunTrust promotes inclusive behaviors that inspire
a commitment to our purpose, influence a more
engaged culture and positively influence teammates,
communities and clients.
Our teammate networks are open to all teammates
seeking to understand different backgrounds, experiences,
identities and ideas. And SunTrust is one of more than
150 Fortune 500 companies that signed on to the
Board of Directors
Executive and Senior Managers
First and Middle Managers
Professionals
All Others
Total
23%
38%
51%
53%
73%
61%
31%
18%
32%
36%
50%
41%
Source: January 2018 board data, and October 2017 teammate data produced in
a matter consistent with EEO-1 reporting with aggregation across EEO-1 ethnicity
categories. “All others” includes technicians, sales workers, administrative support
workers, operatives and service workers.
TEAMMATES 30
SunTrust promotes inclusive behaviors
that positively influence teammates,
communities and clients.
TEAMMATES
31
TEAMMATES 32
G
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O
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Learning
Opportunities
Our dedication to improving financial well-being starts with our own teammates. SunTrust
is committed to delivering programs that provide opportunities for professional growth and
development that help encourage progress on the journey to financial confidence.
CONTINUING EDUCATION
IMPROVING TEAMMATE ENGAGEMENT
We have a 93 percent participation rate in our annual
teammate engagement survey, approaching the results for
the most engaged companies globally. That helps us make
SunTrust a great place to work.
When our teammates are engaged in their careers,
their passion helps drive innovation and improve client
satisfaction. That’s why we make every effort to improve
the teammate experience, and it’s paying off.
We encourage teammates to invest in their professional
development and continuous learning. One way we make
it easy for teammates to do this is through Teammate
Learning Week, a week full of learning opportunities that
allow teammates to dedicate time to their journey of
continuous improvement.
•
•
12,555 enrollments (more than doubled from
2016)
140+ sessions covering 70+ topics, from risk-
management practices to purpose-driven
leadership and information security
Through the SunTrust Foundation, college scholarships
were provided to the children of teammates for the
sixth consecutive year.
TEAMMATES
33
Momentum onUp helps employees establish
financial goals, start an emergency savings fund
and navigate their expenses and spending habits.
CLIENTS 34
H
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To Our Clients
G
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Momentum onUp helped move our corporate clients and their employees toward financial
confidence in a big way in 2017. Broadly launched in June at no profit to SunTrust, more
than 70 large and small companies are now participating. The program’s on-site sessions
and online resources help employees establish financial goals, start an emergency savings
fund and navigate their expenses and spending habits. Many companies are also offering
incentives for their employees to complete the program, ranging from $100 to $1,000.
OF THOSE EMPLOYEES SURVEYED
FOLLOWING THE PROGRAM, THEY ARE
SHOWING POSITIVE RESULTS:1
• Employees living by a budget increased from
43% to 87%, and those with an emergency
savings improved from 68% to 98%
• On average, employees increased their
retirement contributions by 35%
• More than 99% of participants would
recommend the program to others
RECEIVING POSITIVE FEEDBACK
One of our partners for 2017 is Gas South. Based in
Atlanta, Georgia, Gas South is a natural gas provider that
serves approximately 290,000 residential, commercial
and governmental customers throughout Georgia and
Florida. They’re equipping their team members with the
tools they need to be successful in their personal lives,
which is then reflected back on their work productivity,
satisfaction and overall happiness.
“Since introducing the program six months ago, more than
75 percent of our employees have registered to participate,
and roughly 40 percent have completed the requirements
to receive our $200 incentive,” shared Kevin Greiner, CEO
of Gas South. “Our employees are not just registering;
they’re completing the activities—including the videos,
quizzes and checklists.
“We’ve been delighted to hear the positive reactions of
our team. Many have remarked that this is the type of
program that makes Gas South a special company that
really cares for its employees. We set a goal to have
100 percent participation, and we are well on our way.”
Kevin continued, “Everyone can set goals to improve their
financial well-being. I love how the Momentum onUp
platform helps me keep better track of all my family’s
finances and highlights where we are spending money.
This helps us have honest conversations on whether we
are meeting our savings goals and spending our money on
the things that are most important to us.”
1Based on the aggregate results of participating companies including but not limited to: Georgia Power Company, Waffle House, City Electric Supply,
22squared, Delta Air Lines, Gas South, 1-800 Contacts, Genuine Parts Company, Home Depot, McKee Foods, United Rentals, Havertys Furniture and Luck
Companies. Results may vary based on company, industry and which program the company employs.
CLIENTS
35
I
N
GHow We Light
The Way
W
O
H
S
Throughout 2017, we worked
diligently to help our clients in
all lines of business gain the
financial confidence they need to
keep moving forward.
CLIENTS 36
IMPROVING AND EXPANDING OUR
CONSUMER EXPERIENCE
ENHANCING OUR
WHOLESALE SERVICES
CONDUC TE D MORE TH AN T WO MILLION
CLIE NT CON VE RSATIONS
to understand their unique needs and guide them to
make confident financial decisions.
INVESTME NT BA NKING
ACHIE V ED ITS 10TH
CONSECUTIVE RECORD YE AR ,
and revenue was up 21% versus 2016.
E XPANDED SERV ICE S FOR SM A LL
BUSINESS CLIE NTS
with the launch of Simple Business Checking,
a solution designed to help these clients begin
their small business journey.
E XPANDE D PRIVATE
WE A LTH M A N AG E M E NT
services into Texas and New York.
COMPLE TE D MORE TH AN 16,000
SUMMIT VIE W® FINANCIAL PL ANS
to build our clients’ confidence now and into the future.
L AUNCHE D ZE LLE ,
giving clients access to a new person-to-person
payments network to more quickly and easily send
and receive money.
COMME RCIAL BANKING
opened new offices in Cincinnati and Cleveland, Ohio,
as well as Dallas–Fort Worth, Texas.
TRE A SURY & PAY M E NT S O LUTIO N S
L AUNCHED SUNVIE W ONLINE
TRE A SURY M A N AG E R (OTM),
an enhanced online platform for business clients to
manage everything from payroll to cash flow. More than
50% of OTM clients are on the new SunView platform.
REDUCE D LOAN ORIG INATION TIMES
AND IMPROVED TR ANSPARENC Y
with nCino, our new loan origination platform, for
Commercial Banking, Commercial Real Estate
and Private Wealth Management. This provides a
significantly improved experience for both clients and
teammates.
E NH A NCE D ONLINE A ND
MOBILE BA NKING
by adding one-time passcodes to strengthen security
by protecting clients’ information during authentication.
We also introduced the ability for clients to turn credit
cards on and off to help reduce credit card fraud.
18SUN_10846129_2018 Annual Report AD: Ally Hill • BL: Megan Griswold
DIGITAL VERSION
final size: 8.25" x 10.75"
scale: 100%
FOSTERED PRODUC TIVE DIALOGUE
through two joint client networking events for our
commercial banking business owners and private equity
clients in CIB, hosted by Commercial Banking and
Investment Banking (SunTrust Robinson Humphrey).
Release Date: 2/16/2018
Notes: Prints 4/C
UNVE ILED THE MEDIC AL
PRO FE SS I O N A L S M O RTGAG E
as an extension of our Doctor Loan Program. We
introduced a new, affordable Medical Professional
Mortgage tailored to meet the specific needs of all
medical practitioners.
x
Original Artwork
CLIENTS
37
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
William H. Rogers, Jr.1
Chairman and Chief Executive Officer
William H. Rogers, Jr.
Chairman and Chief
Executive Officer
Dallas S. Clement2,4
Executive Vice President and Chief Financial
Officer, Cox Enterprises, Atlanta, Georgia
Jorge Arrieta
General Auditor
Paul R. Garcia2,3
Former Chairman and Chief Executive Officer,
Global Payments Inc., Atlanta, Georgia
Margaret L. Callihan
Chief Human Resources Officer
M. Douglas Ivester1,3,4
President, Deer Run Investments, LLC,
Atlanta, Georgia
Kyle Prechtl Legg1,2,3
Former President and Chief Executive Officer,
Legg Mason Capital Management,
Baltimore, Maryland
Donna S. Morea3,5
Chief Executive Officer, Adesso Group,
Royal Oak, Maryland
David M. Ratcliffe1,3,5
Retired Chairman, President and Chief
Executive Officer, Southern Company,
Atlanta, Georgia
Agnes Bundy Scanlan4,5
Senior Advisor for Treliant Risk Advisors
Frank P. Scruggs , Jr.3,5
Partner, Berger Singerman LLP,
Ft. Lauderdale, Florida
Scott E. Case
Chief Information Officer
Mark A. Chancy
Vice Chairman &
Co-Chief Operating Officer
Hugh S. (Beau) Cummins, III
Co-Chief Operating Officer
L. Allison Dukes
Chief Financial Officer
Ellen M. Fitzsimmons
General Counsel and
Corporate Secretary
Jerome T. Lienhard, II
Chief Risk Officer
OPERATING COUNCIL
Mark A. Chancy
Vice Chairman &
Co-Chief Operating Officer
Reggie Davis
Head of Business Banking/Metro Mkt.
Arnold Evans
Enterprise Ethics Officer
Kathy Farrell
Head of Commercial Real Estate
John Gregg
Head of Corporate & Investment Banking
Susan Johnson
Chief Marketing Officer
John Knott
Head of Corporate Strategy
Ellen Koebler
Head of Consumer Solutions
Dan Massey
Chief Technology Officer,
Wholesale Segment
Michael Maza
Head of Treasury & Payment Solutions
Ken Meyer
Chief Technology Officer,
Consumer Segment
Tom Parks
Head of Consumer &
Small Business Solutions
Bruce L. Tanner4,5
Executive Vice President and Chief Financial
Officer, Lockheed Martin Corporation,
Bethesda, Maryland
Hugh S. (Beau) Cummins, III
Co-Chief Operating Officer
Akhila Rao
LightStream Strategy Manager
Vickie Brown
Head of Efficiency Office
Ameet Shetty
Chief Data & Analytics Officer
Steve Voorhees4,5
Chief Executive Officer,
WestRock, Atlanta, Georgia
Thomas R. Watjen1,2,4
Former Chairman of the Board,
Unum Group, Chattanooga, Tennessee
Dr. Phail Wynn , Jr.1,2,4
Vice President, Durham and Regional Affairs,
Duke University, Durham, North Carolina
1 Executive Committee
2 Audit Committee
3 Compensation Committee
4 Governance and Nominating Committee
5 Risk Committee
Jason Cagle
Commercial Banking Executive
Joe Thompson
Head of Private Wealth Management
Todd Chamberlain
Head of Mortgage Banking
Ameesh Vakharia
Omni Channel Executive
Debbie Crowder
Head of Branch Banking
Ankur Vyas
Director of Investor Relations and
Assistant Treasurer
Woody Woodring
Chief Credit Officer
38
Shareholder
Information
QUARTERLY COMMON STOCK PRICES
AND DIVIDENDS
CREDIT RATINGS
Ratings as of December 31, 2017.
The quarterly high, low and close prices of the SunTrust
common stock for each quarter of 2017 and 2016 and
the dividends paid per share are shown below.
Quarter Ended
2017
December 31
September 30
June 30
March 31
2016
December 31
September 30
June 30
March 31
Market Price
High
Low
Close
Dividends
Paid
$66.62
60.04
58.75
61.69
$56.48
44.61
44.32
42.04
$56.30
51.96
52.69
52.71
$43.41
38.75
35.10
31.07
$64.59
59.77
56.72
55.30
$54.85
43.80
41.08
36.08
$0.40
0.40
0.26
0.26
$0.26
0.26
0.24
0.24
Moody’s
Standard
& Poor’s
Fitch
Bank Level
Long-term ratings
Deposits
Senior debt
Subordinated debt
Short-term ratings
A1
Baa1
Baa1
P-1
Corporate Level
Long-term ratings
Senior debt
Subordinated debt
Preferred stock
Baa1
Baa1
Baa3
A-
A-
BBB+
A-2
BBB+
BBB
BB+
A
A-
BBB+
F1
A-
BBB+
BB
Ratings Outlook
Stable
Positive
Stable
NOTICE OF ANNUAL MEETING
INVESTOR RELATIONS WEBSITE
CLIENT INFORMATION
The Annual Meeting of Shareholders will be
held on Tuesday, April 24, 2018 at 9:30 a.m.
EST in Suite 105 on the first floor of SunTrust
Plaza Garden Offices, 303 Peachtree Center
Avenue, Atlanta, Georgia.
To find the latest investor information
about SunTrust, including stock quotes,
news releases, corporate governance
information and financial data, go to
investors.suntrust.com.
STOCK TRADING
ANALYST INFORMATION
SunTrust Banks, Inc. common stock is traded
on the New York Stock Exchange (NYSE) under
the symbol STI.
SHAREHOLDER SERVICES
Registered shareholders of SunTrust Banks,
Inc. who wish to change the name, address or
ownership of common stock, or to report lost
certificates or consolidate accounts, should
contact our transfer agent:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
866.299.4214
www.computershare.com
For general shareholder information, contact
Investor Relations at 877.930.8971.
Analysts, investors and others
seeking additional financial information should
contact:
Ankur Vyas
Director of Investor Relations
and Assistant Treasurer
SunTrust Banks, Inc.
P.O. Box 4418
Mail Code: GA-ATL-645
Atlanta, GA 30302-4418
877.930.8971
If you wish to contact Investor Relations
via email, please use the “Contact IR” link
on the Investor Relations website at
investors.suntrust.com.
For assistance with SunTrust products
and services, call 800.SUNTRUST or
visit suntrust.com.
WEBSITE ACCESS TO
UNITED STATES SECURITIES
AND EXCHANGE
COMMISSION FILINGS
All reports filed electronically by SunTrust
Banks, Inc. with the United States Securities
and Exchange Commission, including the
annual report on Form 10-K, quarterly
reports on Form 10-Q, current event
reports on Form 8-K and amendments to
those reports filed or furnished pursuant
to Sections 13(a) or 15(d) of the Exchange
Act, are accessible as soon as reasonably
practicable at no cost on the Investor
Relations website at
investors.suntrust.com.
39
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission file number 001-08918
SunTrust Banks, Inc.
(Exact name of registrant as specified in its charter)
Georgia
(State or other jurisdiction of incorporation or organization)
58-1575035
(I.R.S. Employer Identification No.)
303 Peachtree Street, N.E., Atlanta, Georgia 30308
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (800) 786-8787
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock
Depositary Shares, Each Representing 1/4000th Interest in a Share of Perpetual Preferred Stock, Series A
5.853% Fixed-to-Floating Rate Normal Preferred Purchase Securities of SunTrust Preferred Capital I (representing
interests in shares of Perpetual Preferred Stock, Series B)
Depositary Shares, Each Representing 1/4000th Interest in a Share of Perpetual Preferred Stock, Series E
Warrants to Purchase Common Stock at $44.15 per share, expiring November 14, 2018, Series B
Warrants to Purchase Common Stock at $33.70 per share, expiring December 31, 2018, Series A
Name of Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common stock held by non-affiliates at June 30, 2017 was approximately $26.8 billion based on the
New York Stock Exchange closing price for such shares on that date. For purposes of this calculation, the registrant has assumed that all of its directors and
executive officers are affiliates.
At February 16, 2018, 468,300,176 shares of the registrant’s common stock, $1.00 par value, were outstanding.
Pursuant to Instruction G of Form 10-K, information in the registrant’s Definitive Proxy Statement for its 2018 Annual Shareholder’s Meeting, which it will
file with the SEC no later than April 24, 2018 (the “Proxy Statement”), is incorporated by reference into Items 10-14 of Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
GLOSSARY OF DEFINED TERMS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Auditor's Reports
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1 - Significant Accounting Policies
Note 2 - Acquisitions/Dispositions
Note 3 - Federal Funds Sold and Securities Financing Activities
Note 4 - Trading Assets and Liabilities and Derivative Instruments
Note 5 - Securities Available for Sale
Note 6 - Loans
Note 7 - Allowance for Credit Losses
Note 8 - Premises and Equipment
Note 9 - Goodwill and Other Intangible Assets
Note 10 - Certain Transfers of Financial Assets and Variable Interest Entities
Note 11 - Borrowings and Contractual Commitments
Note 12 - Net Income Per Common Share
Note 13 - Capital
Note 14 - Income Taxes
Note 15 - Employee Benefit Plans
Note 16 - Guarantees
Note 17 - Derivative Financial Instruments
Note 18 - Fair Value Election and Measurement
Note 19 - Contingencies
Note 20 - Business Segment Reporting
Note 21 - Accumulated Other Comprehensive Loss
Note 22 - Parent Company Financial Information
Item 9.
Item 9A.
Item 9B.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
Page
i
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8
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20
20
20
21
21
23
25
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72
72
74
75
76
77
78
79
79
90
90
92
93
97
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106
107
110
113
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115
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128
138
153
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163
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163
164
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164
164
164
164
165
165
170
GLOSSARY OF DEFINED TERMS
2017 Tax Act — Tax Cuts and Jobs Act of 2017.
ABS — Asset-backed securities.
ACH — Automated clearing house.
AFS — Available for sale.
AIP — Annual Incentive Plan.
ALCO — Asset/Liability Committee.
ALM — Asset/Liability Management.
ALLL — Allowance for loan and lease losses.
AML — Anti-money laundering.
AOCI — Accumulated other comprehensive income.
APIC — Additional paid-in capital.
ASC — Accounting Standards Codification.
ASU — Accounting Standards Update.
ATE — Additional termination event.
ATM — Automated teller machine.
Bank — SunTrust Bank.
Basel III — the Third Basel Accord, a comprehensive set of
reform measures developed by the BCBS.
BCBS — Basel Committee on Banking Supervision.
BHC — Bank holding company.
BHC Act — Bank Holding Company Act of 1956.
Board — the Company’s Board of Directors.
bps — Basis points.
BRC — Board Risk Committee.
CC — Capital Committee.
CCAR — Comprehensive Capital Analysis and Review.
CCB — Capital conservation buffer.
CD — Certificate of deposit.
CDR — Conditional default rate.
CDS — Credit default swaps.
CECL — Current expected credit loss.
CET1 — Common Equity Tier 1 Capital.
CEO — Chief Executive Officer.
CFO — Chief Financial Officer.
CFPB — Consumer Financial Protection Bureau.
CFTC — Commodity Futures Trading Commission.
CIB — Corporate and investment banking.
C&I — Commercial and industrial.
Class A shares — Visa Inc. Class A common stock.
Class B shares — Visa Inc. Class B common stock.
CLO — Collateralized loan obligation.
CME — Chicago Mercantile Exchange.
Company — SunTrust Banks, Inc.
CP — Commercial paper.
CPP — Capital Purchase Program established by the U.S.
Treasury.
CPR — Conditional prepayment rate.
CRA — Community Reinvestment Act of 1977.
CRE — Commercial real estate.
CRO — Chief Risk Officer.
CSA — Credit support annex.
DDA — Demand deposit account.
DIF — Deposit Insurance Fund.
Dodd-Frank Act — Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010.
DOJ — Department of Justice.
DTA — Deferred tax asset.
DTL — Deferred tax liability.
DVA — Debit valuation adjustment.
EBPC — Enterprise Business Practices Committee.
EORO — Enterprise Operational Risk Officer.
EPS — Earnings per share.
ER — Enterprise Risk.
ERC — Enterprise Risk Committee.
ERISA — Employee Retirement Income Security Act of 1974.
Exchange Act — Securities Exchange Act of 1934.
Fannie Mae — Federal National Mortgage Association.
FASB — Financial Accounting Standards Board.
Form 8-K and tax reform-related items — items announced in
the Company's Form 8-K filed with SEC on December 4, 2017
and items related to the enactment of the 2017 Tax Act during
the fourth quarter of 2017.
Freddie Mac — Federal Home Loan Mortgage Corporation.
FDIC — Federal Deposit Insurance Corporation.
Federal Reserve — Federal Reserve System.
Fed Funds — Federal funds.
FFIEC — Federal Financial Institutions Examination Council.
FHA — Federal Housing Administration.
FHLB — Federal Home Loan Bank.
FICA — Federal Insurance Contributions Act.
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.
GFO — GFO Advisory Services, LLC.
Ginnie Mae — Government National Mortgage Association.
GLBA — Gramm-Leach-Bliley Act.
GSE — Government-sponsored enterprise.
HAMP — Home Affordable Modification Program.
HRA — Health Reimbursement Account.
HUD — U.S. Department of Housing and Urban Development.
IPO — Initial public offering.
IRLC — Interest rate lock commitment.
IRS — Internal Revenue Service.
ISDA — International Swaps and Derivatives Association.
LCH — LCH.Clearnet Limited.
LCR — Liquidity coverage ratio.
LGD — Loss given default.
LHFI — Loans held for investment.
LHFS — Loans held for sale.
LIBOR — London InterBank Offered Rate.
LOCOM — Lower of cost or market.
LTI — Long-term incentive.
LTV— Loan to value.
MasterCard — MasterCard International.
MBS — Mortgage-backed securities.
MD&A — Management’s Discussion and Analysis of Financial
Condition and Results of Operation.
MI — Mortgage insurance.
Moody’s — Moody’s Investors Service.
MRA — Master Repurchase Agreement.
MRM — Market Risk Management.
i
MRMG — Model Risk Management Group.
MSR — Mortgage servicing right.
MVE — Market value of equity.
NCF — National Commerce Financial Corporation.
NOL — Net operating loss.
NOW — Negotiable order of withdrawal account.
NPA — Nonperforming asset.
NPL — Nonperforming loan.
NPR — Notice of proposed rulemaking.
NSFR — Net stable funding ratio.
NYSE — New York Stock Exchange.
OCC — Office of the Comptroller of the Currency.
OCI — Other comprehensive income.
OFAC — Office of Foreign Assets Control.
OREO — Other real estate owned.
OTC — Over-the-counter.
OTTI — Other-than-temporary impairment.
PAC — Premium Assignment Corporation.
Parent Company — SunTrust Banks, Inc. (the parent Company
of SunTrust Bank and other subsidiaries).
Patriot Act — The USA Patriot Act of 2001.
PD — Probability of default.
Pillar — substantially all of the assets of the operating
subsidiaries of Pillar Financial, LLC.
PMC — Portfolio Management Committee.
PPA — Personal Pension Account.
PPNR — Pre-provision net revenue.
PWM — Private Wealth Management.
REIT — Real estate investment trust.
ROA — Return on average total assets.
ROE — Return on average common shareholders’ equity.
ROTCE — Return on average tangible common shareholders'
equity.
RSU — Restricted stock unit.
RWA — Risk-weighted assets.
S&P — Standard and Poor’s.
SBA — Small Business Administration.
SBFC — SunTrust Benefits Finance Committee.
SEC — U.S. Securities and Exchange Commission.
SERP — Supplemental Executive Retirement Plan.
STAS — SunTrust Advisory Services, Inc.
STCC — SunTrust Community Capital, LLC.
STIS — SunTrust Investment Services, Inc.
STM — SunTrust Mortgage, Inc.
STRH — SunTrust Robinson Humphrey, Inc.
SunTrust — SunTrust Banks, Inc.
TDR — Troubled debt restructuring.
TRS — Total return swaps.
U.S. — United States.
U.S. GAAP — Generally Accepted Accounting Principles in the
U.S.
U.S. Treasury — the U.S. Department of the Treasury.
UPB — Unpaid principal balance.
UTB — Unrecognized tax benefit.
VA —Veterans Administration.
VAR —Value at risk.
VEBA — Voluntary Employees' Beneficiary Association.
VI — Variable interest.
VIE — Variable interest entity.
Visa — the Visa, U.S.A. Inc. card association or its affiliates,
collectively.
Visa Counterparty — a financial institution that purchased the
Company's Visa Class B shares.
VOE — Voting interest entity.
ii
PART I
Item 1.
BUSINESS
located
General
SunTrust Banks, Inc. (“we,” “us,” “our,” “SunTrust,” or “the
Company”) is a leading provider of financial services, with our
in Atlanta, Georgia. Our principal
headquarters
subsidiary is SunTrust Bank (“the Bank”). The Company was
incorporated in the State of Georgia in 1984 and offers a full line
of financial services for consumers, businesses, corporations,
institutions, and not-for-profit entities, both through its branches
(located primarily in Florida, Georgia, Virginia, North Carolina,
Tennessee, Maryland, South Carolina, and the District of
Columbia) and through other national delivery channels. The
Bank offers deposit, credit, and trust and investment services to
its clients through a selection of full-, self-, and assisted-service
channels, including branch, call center, Teller Connect™
machines, ATMs, online, mobile, and tablet. Other subsidiaries
provide capital markets, mortgage banking, securities brokerage,
investment banking, and wealth management services. At
December 31, 2017, the Company had total assets of $206 billion
and total deposits of $161 billion.
We operate two business segments: Consumer and Wholesale,
with our functional activities included in Corporate Other.
information
Additional
regarding our businesses and
subsidiaries is included in the information set forth in Item 7,
MD&A, as well as Note 20, “Business Segment Reporting,” to
the Consolidated Financial Statements in this Form 10-K.
Regulation and Supervision
We are limited under the BHC Act to banking, managing or
controlling banks, and other activities that the FRB has
determined to be closely related to banking. The Company, a
BHC, elected to become a financial holding company pursuant
to the GLBA, allowing it to engage in a broader range of activities
that are (i) financial in nature or incidental to financial activities
or (ii) complementary to a financial activity and do not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system in general. These expanded
services include securities underwriting and dealing, insurance
underwriting, merchant banking, and insurance company
portfolio investment, and are subject to the Volcker Rule and
other restrictions discussed below.
As a financial holding company, the Company and its
banking subsidiary are required to be “well capitalized” and
“well managed” while maintaining at least a “satisfactory” CRA
rating. In the event of noncompliance, the Federal Reserve may,
among other things, limit the Company’s ability to conduct these
broader financial activities or, if the deficiencies persist, may
require the Company to divest its banking subsidiary.
Furthermore, if the Company does not have a satisfactory CRA
rating, it may not commence any new financial activities,
although the Company will still be allowed to engage in activities
closely related to banking.
The Federal Reserve regulates BHCs under the BHC Act,
with residual supervisory authority over “functionally regulated”
subsidiaries such as the Company's broker-dealer and investment
1
adviser subsidiaries. Our non-banking subsidiaries are regulated
by various other regulatory bodies with supervisory authority
over the particular activities of those subsidiaries. For example,
STRH and STIS are broker-dealers registered with the SEC and
members of FINRA, and STAS is an investment advisor
registered with the SEC. STIS is also an insurance agency
registered with state insurance commissions.
The Bank is an FDIC-insured commercial bank chartered
under the laws of the State of Georgia and is a member of the
Federal Reserve System. In addition to regulation by the FRB,
the Bank and the Company are regulated by the Georgia
Department of Banking and Finance. The FDIC also has
jurisdiction over certain activities of the Bank as an insured
depository institution. As a Georgia-chartered commercial bank,
the Bank's powers are limited to activities permitted by Georgia
and federal banking laws. Generally, the Bank may engage in all
usual banking activities such as taking deposits, lending money,
issuing letters of credit, currency trading, and offering safe
deposit box services.
As an umbrella supervisor under the GLBA's system of
functional regulation, the FRB requires that financial holding
companies operate in a safe and sound manner so that their
financial condition does not threaten the viability of affiliated
depository institutions.
The Dodd-Frank Act, among other things, implemented
changes that affected the oversight and supervision of financial
institutions, provided for a new resolution procedure for large
financial companies, created the CFPB, introduced more
stringent regulatory capital requirements and significant changes
in the regulation of OTC derivatives, reformed the regulation of
credit rating agencies, increased controls and transparency in
corporate governance and executive compensation practices,
incorporated the Volcker Rule, required registration of advisers
to certain private funds, and influenced significant changes in
the securitization market. Dodd-Frank Act requirements
typically apply to BHCs with greater than $10 billion of
consolidated assets, and the requirements increase at certain asset
size thresholds (most notably, $50 billion of consolidated assets
and $250 billion of consolidated assets).
Enhanced Prudential Standards
BHCs with consolidated assets of $50 billion or more are subject
to enhanced prudential standards and capital requirements. The
Dodd-Frank Act directs the FRB to establish heightened
prudential standards for (i) risk-based capital requirements and
leverage limits, (ii) liquidity risk management requirements, (iii)
overall risk management requirements, (iv) stress testing, (v)
resolution planning, (vi) credit exposure and concentration
limits, and (vii) early remediation actions that must be taken
under certain conditions in the early stages of financial distress.
the FRB adopted a final rule
implementing the enhanced liquidity and risk management
requirements; it requires greater supervision and oversight of
liquidity and general risk management by boards of directors and
includes capital planning and stress testing requirements. In
In February 2014,
addition, the rule requires publicly traded U.S. BHCs with total
consolidated assets of $10 billion or more to establish enterprise-
wide risk committees. The
liquidity risk management
requirements are in addition to those imposed by the LCR rule.
Enhanced Capital Standards
In July 2013, the U.S. banking regulators promulgated final rules
substantially implementing the Basel III capital framework and
various Dodd-Frank Act provisions (the “Capital Rules”). The
Capital Rules increased regulatory capital requirements of U.S.
banking organizations and revised the level at which the Bank
becomes subject to corrective action as described in the “prompt
corrective action” section below. The “Collins” amendment to
the Dodd-Frank Act required federal banking regulators to
impose a generally applicable leverage capital ratio regardless
of institution size and to phase out certain “hybrid” capital
elements from Tier 1 capital treatment. The Company became
subject to the Capital Rules on January 1, 2015. For additional
information regarding the Capital Rules, including recent
updates and/or changes to the rules and related requirements,
refer to the "Capital Resources" section of Item 7, MD&A, in
this Form 10-K.
Distributions
There are various legal and regulatory limits on the extent to
which the Bank may pay dividends or otherwise supply funds to
its Parent Company. Federal and state bank regulatory agencies
have the authority to prevent the Bank from paying dividends or
engaging in any other activity that, in the opinion of the agency,
would constitute an unsafe or unsound practice. Restrictions on
capital distributions, share repurchases and redemptions, and
discretionary bonus payments to executive officers are imposed
on banks that are unable to sustain the capital conservation buffer
above the minimum CET1, Tier 1, and Total capital ratios. The
capital conservation buffer is a buffer above the minimum levels
designed to ensure that banks remain well-capitalized, even in
adverse economic scenarios.
See additional discussion of Basel III in the "Capital
Resources" section of Item 7, MD&A, in this Form 10-K.
Mandatory Liquidity Coverage Ratio (“LCR”); Net Stable
Funding Ratio (“NSFR”)
In September 2014, the FRB, OCC, and the FDIC approved
rulemaking that established, for the first time, a quantitative
minimum LCR for large, internationally active banking
organizations, and a less stringent LCR (“modified LCR”) for
BHCs with less than $250 billion in total assets, such as the
Company. The LCR requires a banking entity to maintain
sufficient liquidity to withstand an acute 30-day liquidity stress
scenario. The LCR became effective for the Company on January
1, 2016, with a minimum requirement of 90% of high-quality,
liquid assets to total net cash outflows; full compliance of 100%
was required beginning January 1, 2017. The Company has met
LCR requirements within the regulatory timelines and at
December 31, 2017, its LCR was above the 100% regulatory
requirement.
On December 19, 2016, the FRB published the final rule,
promulgated as Regulation WW, which will require us to
information, with certain
publicly disclose qualitative
2
qualifications and permitted limitations related to information
that is proprietary or confidential to the Company, about (i)
certain components of our LCR calculation in a standardized
tabular format (LCR disclosure template) and (ii) factors that
have significant effect on the LCR, to facilitate an understanding
of our calculations and results. The rule aims to promote market
discipline by providing the public with comparable liquidity
information about covered companies. The disclosures must be
made on a covered company's public internet site or in a public
financial or regulatory report. The disclosures must remain
available to the public for at least five years from the time of
initial disclosure. Covered companies subject to modified LCR,
including the Company, will be required to comply with
disclosure requirements beginning on October 1, 2018.
On May 3, 2016, the FRB, OCC, and the FDIC proposed a
rule to implement the NSFR. The proposal would require large
U.S. banking organizations to maintain a stable funding profile
over a one-year horizon. The FRB proposed a modified NSFR
requirement for bank holding companies with greater than $50
billion but less than $250 billion in total consolidated assets and
less than $10 billion in total on balance sheet foreign exposure.
As proposed, the rule would require us to publicly disclose our
NSFR and the components of the NSFR each calendar quarter.
The agencies intend the NSFR to complement the LCR, liquidity
risk management, and stress testing requirements under the
FRB's Regulation YY (enhanced prudential standards for BHCs
with total consolidated assets of $50 billion or more). The
proposed rule contains an implementation date of January 1,
2018; however, a final rule has not yet been issued.
See additional discussion of the LCR and NSFR in the
"Liquidity Risk Management" section of Item 7, MD&A, in this
Form 10-K.
Capital Planning; Stress Testing
Pursuant to the Dodd-Frank Act, BHCs are required to conduct
company-run stress tests and to perform supervisory stress tests
directed by the FRB. BHCs with more than $10 billion in total
consolidated assets must conduct an annual company-run stress
test, and those with total consolidated assets exceeding $50
billion must conduct an additional mid-cycle stress test. For
company-run stress tests, BHCs use the same planning horizon,
capital action assumptions, and scenarios as those used in the
supervisory stress tests. Stress testing is designed to assess
whether the covered Company's capital is sufficient to absorb
losses during stressful conditions, while meeting obligations to
creditors and counterparties, and, to the extent applicable,
continuing to serve as credit intermediaries.
The Company also is subject to supervisory stress testing
requirements under the FRB's Capital Plan Rule, which the FRB
implements as part of its CCAR process. CCAR is a broad
supervisory program that includes stress testing and assesses a
covered company’s practices for determining capital needs,
including its risk measurement and management practices,
capital planning and decision-making, and associated internal
controls and governance. The Company is required to publish a
summary of the results of its annual stress test, and the FRB
publishes the results of the stress testing under adverse and
severely adverse scenarios.
The Capital Plan Rule finalized in late 2011 requires a U.S.
BHC with consolidated assets of $50 billion or more to develop
and maintain a capital plan that is reviewed and approved by its
board of directors or a committee thereof. Capital plans are
intended to allow the FRB to assess the BHC’s systems and
processes of incorporating forward-looking projections of assets
and liabilities, revenues and losses, and to monitor and maintain
their internal capital adequacy. Under the Capital Plan Rule, each
capital plan must address, among other capital actions, projected
capital ratios under stress scenarios, planned dividends and other
capital distributions, and share repurchases over a minimum nine
quarter planning horizon. Prior to executing a capital plan, a non-
objection notification must be received from the FRB. If the FRB
objects to our capital plan, we may not make certain capital
distributions until the FRB's non-objection to the distribution is
received.
In January 2017, the FRB released a final rule that revises
capital plan and stress test rules, whereby certain BHCs,
including the Company, with less than $250 billion in total
consolidated assets will no longer be subject to the qualitative
component of the FRB’s annual CCAR. The final rule also
modifies certain regulatory reports to collect additional
information on nonbank assets and to reduce reporting burdens
for large and noncomplex firms.
For additional information regarding Capital Planning and
Stress Testing, refer to the "Capital Resources" section of Item
7, MD&A, in this Form 10-K.
Regulatory Regime for Swaps
The Dodd-Frank Act established a new comprehensive
regulatory regime for the OTC swaps market, aimed at increasing
transparency and reducing systemic risk in the derivatives
markets, including requirements for central clearing, exchange
trading, capital, margin, reporting, and recordkeeping. The
Dodd-Frank Act requires that certain swap dealers register with
one or both of the SEC and CFTC, depending on the nature of
the swaps business. The Bank provisionally registered with the
CFTC as a swaps dealer, subjecting the Bank to new
requirements under this regulatory regime including trade
reporting and record keeping requirements, business conduct
requirements (including daily valuations, disclosure of material
risks associated with swaps and disclosure of material incentives
and conflicts of interest), mandatory clearing and exchange
trading requirements for certain standardized swaps designated
by the CFTC, and increased capital requirements established by
the FRB. Subject to the SEC's finalization of certain rules
applicable to security-based swaps, the Bank expects to register
with the SEC as a security-based swap dealer. Such registration
will subject the Bank’s security-based swaps business to similar
Dodd-Frank Act requirements, including trade reporting,
business conduct standards, recordkeeping, and potentially
mandatory clearing and exchange requirements. In 2020, our
derivatives business involving uncleared swaps is expected to
become subject to margin requirements established by the FRB,
which may exceed current market practice.
company's strategy for rapid and orderly resolution in case of
material financial distress or failure.
The FRB and FDIC have widely promoted resolution plans
as core elements of reforms intended to mitigate risks to the U.S.
financial system, and to end the “too big to fail” status of the
largest financial institutions. Covered institutions are expected
to file their resolution plans annually, or at the direction of
regulators, regardless of the financial condition or nature of
operations of the institution. Preparation and review of these
resolution plans is a major undertaking for covered financial
institutions. If a plan is not credible, the Company and the Bank
may be restricted in expansionary activities, or be subjected to
more stringent capital, leverage, or liquidity requirements. The
Company and the Bank submitted resolution plans to the FRB
and FDIC in December 2015. During 2016, the FRB and FDIC
waived the covered financial institutions' requirement to file their
resolution plans. The FRB and FDIC provided feedback
regarding the Company's and the Bank's 2015 resolution plans
during 2017. The Company submitted its updated resolution plan
to the FRB in December 2017. The Bank is developing its
resolution plan to be responsive to feedback received and will
submit its plan to the FDIC in 2018.
The FDIC issued a final rule in November 2016 requiring
insured depository institutions with more than two million
deposit accounts to create and maintain comprehensive and
detailed deposit account records to facilitate the determination
of FDIC insured deposits in the event of a bank failure. Under
the rule, the FDIC must be able to use the failing bank's systems,
data, and staff to calculate the insured and uninsured amounts
for each depositor and place holds on portions of uninsured
deposits. The Bank will be required to be in compliance with this
rule by May 2020.
Deposit Insurance
The Bank’s depositors are insured by the FDIC up to the
applicable limits, which is currently $250,000 per account
ownership type. The FDIC provides deposit insurance through
the DIF, which the FDIC maintains by assessing depository
institutions, including the Bank, an insurance premium. The
Dodd-Frank Act changed the statutory regime governing the DIF.
By September 30, 2020, the FDIC must increase the amount in
the deposit insurance fund to 1.35% of insured deposits, impose
a premium on banks to reach this goal, and offset the effect of
assessment increases for institutions with less than $10 billion
in total consolidated assets. In March 2016, the FDIC issued a
final rule to address this surcharge on banks by collecting those
premiums from banks with more than $10 billion in consolidated
assets. This surcharge began in the third quarter of 2016.
Source of Strength
FRB policy requires BHCs to act as a source of financial strength
to each subsidiary bank and to commit resources to support each
subsidiary. This policy was codified in the Dodd-Frank Act,
though no regulations have been proposed to define the scope
of this financial support.
Resolution Planning
BHCs with total consolidated assets of $50 billion or more must
submit resolution plans to the FRB and FDIC addressing the
Anti-Money Laundering (“AML”), PATRIOT ACT; OFAC
Sanctions
Anti-money laundering measures and economic sanctions have
3
long been a matter of regulatory focus in the U.S. The Currency
and Foreign Transactions Reporting Act of 1970, commonly
referred to as the "Bank Secrecy Act" or "BSA," requires U.S.
financial institutions to assist U.S. government agencies to detect
and prevent money laundering by imposing various reporting
and recordkeeping requirements on financial institutions.
Passage of the Patriot Act renewed and expanded this focus,
extending greatly the breadth and depth of anti-money
laundering measures required under the BSA. The Patriot Act
requires all financial institutions to establish certain anti-money
laundering compliance and due diligence programs, including
enhanced due diligence policies, procedures, and controls for
certain types of relationships deemed to pose heightened risks.
In cooperation with federal banking regulatory agencies, the
Financial Crimes Enforcement Network ("FinCEN")
is
responsible for implementing, administering, and enforcing BSA
compliance.
Federal banking regulators and FinCEN continue to
emphasize their expectation that financial institutions establish
and implement robust BSA/AML compliance programs.
Consistent with this supervisory emphasis, in August 2014,
FinCEN issued an advisory stressing its expectations for
financial
institutions’ BSA/AML compliance programs,
including specific governance, staffing and resource allocation,
and testing and monitoring requirements. Furthermore, FinCEN
proposed a rule that would require financial institutions to obtain
beneficial ownership information from all legal entities with
which they conduct business.
OFAC has primary responsibility for administering and
enforcing economic and trade sanctions, which are broad-based
measures, derived from U.S. foreign policy and national security
objectives. These sanctions are imposed on designated foreign
international narcotics
terrorists,
countries and persons,
traffickers, and persons involved in activities relating to
proliferation of weapons of mass destruction. While the
sanctions laws are separate from the BSA and AML laws, these
regimes overlap in purpose. All U.S. persons must comply with
U.S. sanctions laws. The Company must ensure that its
operations, including its provision of services to clients, are
designed to ensure compliance with U.S. sanctions laws. Among
other things, the Company must block accounts of, and
transactions with, sanctioned persons and report blocked
transactions after their occurrence.
Over the past several years, federal banking regulators,
increased supervisory and
FinCEN, and OFAC have
enforcement attention on U.S. anti-money laundering and
sanctions laws, as evidenced by a significant increase in
enforcement activity, including several high profile enforcement
actions. Several of these actions have addressed violations of
AML laws, U.S. sanctions laws, or both, resulting in the
imposition of substantial civil monetary penalties. In both the
BSA/AML and sanctions areas, enforcement actions have
increasingly focused on publicly identifying individuals and
holding those individuals, including compliance officers,
accountable
in BSA/AML compliance
programs. State attorneys general and the DOJ have also pursued
enforcement actions against banking entities alleged to have
willfully violated AML and U.S. sanctions laws.
for deficiencies
4
Consumer Financial Protection
The CFPB, established by the Dodd-Frank Act, has broad
rulemaking, supervisory, and enforcement powers under various
federal consumer financial protection laws. Furthermore, the
CFPB is authorized to engage in consumer financial education,
track consumer complaints, request data, and promote the
availability of financial services to under-served consumers and
communities. The CFPB has primary examination and
enforcement authority over institutions with assets of $10 billion
or more. We are subject to a number of federal and state consumer
protection laws, including the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, the Truth in Lending Act, the Truth
in Savings Act, the Electronic Fund Transfer Act, the Expedited
Funds Availability Act, the Home Mortgage Disclosure Act, the
Fair Housing Act, the Real Estate Settlement Procedures Act, the
Fair Debt Collection Practices Act, the Service Members Civil
Relief Act, and these laws’ respective state-law counterparts. The
Company also is subject to state laws regarding unfair and
deceptive acts and practices. Violations of applicable consumer
protection laws can result in significant liability from litigation
brought by customers, including actual damages, restitution, and
attorneys’ fees. In addition, federal bank regulators, state
attorneys general, and state and local consumer protection
agencies may pursue remedies, such as imposition of regulatory
sanctions and penalties, restrictions on expansionary activities,
and requiring customer rescission rights.
(iv)
(iii)
Prompt Corrective Action
The federal banking agencies have broad powers with which to
require companies to take prompt corrective action to resolve
problems of insured depository institutions that do not meet
minimum capital requirements. The law establishes five capital
categories for this purpose: (i) well-capitalized, (ii) adequately
capitalized,
significantly
undercapitalized,
undercapitalized, and (v) critically undercapitalized. The Capital
Rules amended the thresholds in the prompt corrective action
framework to reflect the higher capital ratios required in the
Capital Rules. Under the Capital Rules, to be considered well-
capitalized, an institution generally must have risk-based Total
capital and Tier 1 capital ratios of at least 10% and 6%,
respectively, and must not be subject to any order or written
directive to meet and maintain a specific capital level for any
capital measure. While the prompt corrective action rules apply
to banks and not BHCs, the FRB is authorized to take actions at
the holding company level. The banking regulatory agencies are
required to take mandatory supervisory actions, and have the
discretion to take other actions, as to insured depository
institutions in the three undercapitalized categories, the severity
of which depends on the assigned capital category. For example,
an insured depository institution is generally prohibited from
paying dividends or making capital distributions if it would be
undercapitalized as a result. An undercapitalized institution must
submit a capital restoration plan, which must be guaranteed up
to certain amounts by its parent holding company. Significantly
undercapitalized
to various
requirements and restrictions, such as mandates to sell voting
stock, reduce total assets, and limit or prohibit the receipt of
correspondent bank deposits. Critically undercapitalized
institutions may be subject
institutions are subject to appointment of a receiver or
conservator.
Volcker Rule
Through the “Volcker Rule,” the Dodd-Frank Act amends the
BHC Act by generally prohibiting a banking entity from
engaging in proprietary trading and investing in, sponsoring, or
having certain other relationships with, a private equity, hedge
fund, or certain other types of private funds. The term “banking
entity” covers insured depository institutions, their holding
companies, and certain other entities and their affiliates. There
are limited exceptions to the prohibition on proprietary trading,
such as trading in certain U.S. government or agency securities,
engaging in certain underwriting or market-making activities,
and certain hedging activities. There are also limited exceptions
to the prohibitions on certain activities with covered private
funds, such as for certain activities in connection with a banking
entity's bona fide trust, fiduciary, or investment advisory
business, as well as in connection with public welfare activities
including low income housing finance. All permitted activities
are subject to applicable federal or state laws, restrictions or
limitations that may be imposed by the regulator, including
capital and quantitative limitations as well as diversification
requirements, and must not, among other things, pose a threat to
the safety and soundness of the banking entity or the financial
stability of the U.S. Further, the Volcker Rule's anti-evasion
authority grant to the regulatory agencies requires them to
recordkeeping
impose extensive
their
requirements on banking organizations
compliance with the Volcker Rule.
internal controls and
to ensure
Branching
The Dodd-Frank Act relaxed existing interstate branching
restrictions by modifying the federal statute governing de novo
interstate branching by state member banks. Consequently, a
state member bank may open its initial branch in a state outside
of the bank’s home state by way of an interstate bank branch, so
long as a bank chartered under the laws of that state would be
permitted to open a branch at that location.
Restrictions on Affiliate Transactions
There are limits and restrictions on transactions in which the
Bank and its subsidiaries may engage with the Company and
other Company subsidiaries. Sections 23A and 23B of the
Federal Reserve Act and FRB's Regulation W, among other
things, govern terms and conditions and limit the amount of
extensions of credit, and the amount of collateral required to
secure extensions of credit, by the Bank and its subsidiaries to
the Company and other Company subsidiaries, and limit
purchases of assets by the Bank and its subsidiaries from the
Company and other Company subsidiaries. The Dodd-Frank Act
significantly enhanced and expanded the scope and coverage of
the limitations imposed by Sections 23A and 23B, specifically,
by including derivative transactions as credit extensions subject
to Section 23A and 23B. Furthermore, the Dodd-Frank Act
requires that conforming collateral be maintained for the
duration of covered transactions, rather than only at the time of
the transaction. The FRB has increased its scrutiny of Regulation
W transactions, and has supported its supervision over
5
Regulation W compliance with information received through the
resolution planning process. The FRB has yet to amend
Regulation W or provide guidance in light of the Dodd-Frank
Act's changes to Sections 23A and 23B of the Federal Reserve
Act.
Interchange Rules; “Durbin Amendment”
The Dodd-Frank Act, through a provision known as the “Durbin
Amendment,” required the FRB to establish a cap on the
interchange fees that merchants pay banks for electronic clearing
of debit transactions. In 2011, the FRB issued final rules that
significantly limit the amount of interchange fees a bank may
charge for electronic debit transactions.
Incentive Compensation
In 2010, the FRB and other regulators jointly published final
guidance for structuring incentive compensation arrangements
at financial organizations. The guidance does not set forth any
formulas or pay caps but contains certain principles that
companies are required to follow with respect to employees and
groups of employees that may expose the company to material
amounts of risk. The three primary principles are (i) balanced
risk-taking incentives, (ii) compatibility with effective controls
and risk management, and (iii) strong corporate governance. The
FRB monitors compliance with this guidance as part of its safety
and soundness oversight.
In 2016, the FRB, SEC, and other regulators jointly
published proposed rules on incentive compensation under
Section 956 of the Dodd-Frank Act. The proposed rules would
impose several substantive requirements on the form of our
incentive compensation, including (i) requiring that incentive
compensation payable to a “senior executive officer” or
“significant-risk taker” be subject to a 7-year clawback
requirement; (ii) requiring a substantial portion of incentive
compensation payable to a “senior executive officer” or
“significant-risk taker” to be deferred and subject to the risk of
forfeiture; (iii) prohibiting the acceleration of incentive
compensation that is required to be deferred, other than in the
event of death or disability; (iv) limiting the amount of incentive
compensation payable to “senior executive officers” and
“significant risk-takers” for the attainment of performance
measures in excess of target measures (to 125% and 150% of
target for “senior executive officers” and “significant risk-
takers,” respectively); and (v) requiring the implementation of
an independent risk-monitoring framework. In July 2017, the
SEC released its rulemaking agenda and did not include the rules
under Section 956 of the Dodd-Frank Act. As a result, it is not
certain when the final rules may be issued.
Privacy and Cyber-Security
We are subject to many U.S. federal, state, and international laws
and regulations governing requirements for maintaining policies
and procedures to protect non-public confidential information
of our customers. The GLBA requires us to periodically disclose
our privacy policies and practices relating to sharing such
information and permits consumers to opt out of our ability to
share information with unaffiliated third parties under certain
circumstances. Other laws and regulations, at both the federal
and state level, impact our ability to share certain information
with affiliates and non-affiliates for marketing and/or non-
marketing purposes, or to contact customers with marketing
offers. The GLBA also requires banking institutions to
implement a comprehensive information security program that
includes administrative, technical, and physical safeguards to
ensure the security and confidentiality of customer records and
information. These security and privacy policies and procedures,
for the protection of personal and confidential information, are
in effect across all businesses and geographic locations.
Acquisitions
Our ability to grow through acquisitions is limited by various
regulatory approval requirements. The FRB's prior approval is
required if we wish to (i) acquire all, or substantially all, of the
assets of any bank, (ii) acquire direct or indirect ownership or
control of more than 5% of any class of voting securities of any
bank or thrift, or (iii) merge or consolidate with any other BHC.
Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, as amended by the Dodd-
Frank Act, bank holding companies from any state may acquire
banks located in any other state, subject to certain conditions,
including concentration limits. Additionally, the BHC Act
enumerates the factors the FRB must consider when reviewing
the merger of BHCs, the acquisition of banks, or the acquisition
of voting securities of a bank or BHC. These factors include the
competitive effects of the proposal in the relevant geographic
markets, the financial and managerial resources and future
prospects of the companies and banks involved in the transaction,
the effect of the transaction on the financial stability of the U.S.,
the organizations’ compliance with anti-money laundering laws
and regulations, the convenience and needs of the communities
to be served, and the records of performance, under the CRA, of
the insured depository institutions involved in the transaction.
In addition, in cases involving interstate bank acquisitions, the
FRB must consider the concentration of deposits nationwide and
in certain individual states. Under the Dodd-Frank Act, a BHC
is generally prohibited from merging, consolidating with, or
acquiring, another company if the resulting company’s liabilities
upon consummation would exceed 10% of the aggregate
liabilities of the U.S. financial sector, including the U.S.
liabilities of foreign financial companies.
Competition
We face competition from domestic and foreign lending
institutions and numerous other providers of financial services.
The Company competes using a client-centered model that
focuses on working together as OneTeam to deliver high quality
service, while offering a broad range of products and
services. We believe this approach better positions us to increase
loyalty and deepen existing relationships, while also attracting
new customers. Furthermore, the Company maintains a strong
presence within high-growth Southeast and Mid-Atlantic states,
thereby enhancing its competitive position. While we believe the
Company is well positioned within the highly competitive
financial services industry, the industry could become even more
competitive as a result of legislative, regulatory, economic, and
technological changes, as well as continued consolidation. The
ability of non-banking financial institutions to provide services
previously limited to commercial banks has intensified
6
competition. Because non-banking financial institutions are not
subject to many of the same regulatory restrictions as banks and
bank holding companies, they can often operate with greater
flexibility and with lower cost and capital structures. However,
non-banking financial institutions may not have the same access
to deposit funds or government programs and, as a result, those
non-banking financial institutions may elect, as some have done,
to become financial holding companies to gain such access.
Securities firms and insurance companies that elect to become
financial holding companies may acquire banks and other
financial institutions, which could further alter the competitive
environment in which we conduct business.
Employees
At December 31, 2017, the Company had 23,785 full-time
equivalent employees. None of the domestic employees within
the Company are subject to a collective bargaining agreement.
Management considers its employee relations to be in good
standing.
Additional Information
See also the following additional information, which is
incorporated herein by reference: Business Segments (under the
captions “Business Segments” and “Business Segment Results”
in Item 7, MD&A, in this Form 10-K, and Note 20, “Business
Segment Reporting,” to the Consolidated Financial Statements
in Item 8, Financial Statements and Supplementary Data, of this
Form 10-K); Net Interest Income (under the captions “Net
Interest Income/Margin (FTE)” in the MD&A and “Selected
Financial Data” in Item 6); Securities (under the caption
“Securities Available for Sale” in the MD&A and Note 5 to the
Consolidated Financial Statements); Loans and Leases (under
the captions “Loans”, “Allowance for Credit Losses”, and
“Nonperforming Assets” in the MD&A and “Loans” and
“Allowance for Credit Losses” in Notes 6 and 7, respectively, to
the Consolidated Financial Statements); Deposits (under the
caption “Deposits” in the MD&A); Short-Term Borrowings
(under the caption “Short-Term Borrowings” in the MD&A and
Note 11, “Borrowings and Contractual Commitments,” to the
Consolidated Financial Statements); Trading Activities and
Trading Assets and Liabilities (under the caption “Trading Assets
and Liabilities and Derivatives” in the MD&A and “Trading
Assets and Liabilities and Derivatives” and “Fair Value Election
and Measurement” in Notes 4 and 18, respectively, to the
Consolidated Financial Statements); Market Risk Management
(under the caption “Market Risk Management” in the MD&A);
Liquidity Risk Management (under the caption “Liquidity Risk
Management” in the MD&A); Credit Risk Management (under
the caption “Credit Risk Management” in the MD&A); and
Operational Risk Management (under the caption “Operational
Risk Management” in the MD&A).
The Company's Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available free of
charge on the Company's investor relations website at http://
investors.suntrust.com, as soon as reasonably practicable after
the Company electronically files such material with, or furnishes
it to, the SEC. Furthermore, on the Company's investor relations
website, the Bank makes available, under the heading
"Governance" its (i) codes of ethics for the Board, senior
financial officers, and employees, (ii) its Corporate Governance
Guidelines, and (iii) the charters of SunTrust Board committees.
Reports filed or furnished to the SEC are available at http://
www.sec.gov. The Company's 2017 Annual Report on Form 10-
K is being distributed to shareholders in lieu of a separate annual
report containing financial statements of the Company and its
consolidated subsidiaries.
7
Item 1A.
RISK FACTORS
The risks described in this Form 10-K are not the only risks we
face. Additional risks that are not presently known or that we
deem to be immaterial also may have a material adverse effect
on our financial condition, results of operations, business, and
prospects.
Regulatory Risks
Current and future legislation and regulation could require
us to change our business practices, reduce revenue, impose
additional costs, or otherwise adversely affect business
operations or competitiveness.
together with
As a financial institution, we are subject to extensive state
and federal regulation in the U.S. and in those jurisdictions
outside of the U.S. where we conduct certain limited operations.
This regulation,
increased reporting and
significant existing and proposed legislation and regulatory
requirements, limit the manner in which we do business and
may restrict our ability to compete in our current businesses; to
engage in new or expanded business; to offer certain products
and services; reduce or limit our revenue; subject us to increased
and additional fees, assessments, or taxes; and otherwise
adversely affect our business and operations. Our failure to
comply with the laws, regulations, and rules governing our
business may result in fines, sanctions (including restrictions on
business activities), and damage to reputation. Further,
regulators and bank supervisors continue to exercise qualitative
supervision and regulation of our industry and specific business
operations and related matters, such as resolution planning,
incentive
AML and OFAC compliance programs, and
compensation. Any failure to satisfy regulators' substantive and
qualitative expectations may adversely affect our business and
operations. Violations of laws and regulations or deemed
deficiencies in risk management or other qualitative practices
also may be incorporated into the Company’s bank supervisory
ratings. A downgrade in these ratings, or other regulatory actions
and settlements, can limit the Company’s ability to pursue
acquisitions or conduct other expansionary activities for a period
of time and require new or additional regulatory approvals
before engaging in certain other business activities.
Also, in general, the amounts paid by financial institutions
in settlement of proceedings or investigations and the severity
of other terms of regulatory settlements have been increasing
dramatically. In some cases, governmental authorities have
required criminal pleas, admissions of wrongdoing, imposed
limitations on asset growth, managerial changes, or other
extraordinary terms as part of such settlements, which could
have significant consequences for a financial institution,
including loss of customers, restrictions on the ability to access
the capital markets, and the inability to operate certain
businesses or offer certain products for a period of time. These
enforcement trends also increase the exposure of financial
institutions to civil litigation and reputational damage, leading
to potential loss of customers.
As the primary focus of financial services regulation is the
protection of depositors, FDIC funds, consumers, and the
banking system as a whole, and not protection of shareholders,
this regulation may be adverse to our shareholders' interests.
Legislation or regulation also may impose unexpected or
unintended consequences, the impact of which is difficult to
predict. Other additional regulation that may be adopted could
have a material adverse effect on our business operations,
income, and competitive position, and other negative
consequences.
For more detailed information regarding the regulatory
framework to which we are subject, and a discussion of key
aspects of the Dodd-Frank Act, see the “Regulation and
Supervision” section within Item 1, “Business,” of this Form
10-K.
We are subject to stringent capital adequacy and liquidity
requirements and our failure to meet these would adversely
affect our financial condition.
We, together with our banking subsidiary and broker-dealer
subsidiaries, must satisfy various and substantial capital and
liquidity requirements, subject to qualitative and quantitative
review and assessment by our regulators. Regulatory capital and
liquidity requirements limit how we use our capital and manage
our balance sheet, and can restrict our ability to pay dividends
or to make stock repurchases.
Additionally, our regulatory requirements increase as our
size increases. We become subject to enhanced capital and/or
liquidity requirements after our consolidated assets exceed $250
billion or our on-balance sheet foreign exposure exceeds $10
billion, and our regulators may expect us to begin voluntarily
complying with those requirements as we approach that size.
Market Risks
The monetary and fiscal policies of the federal government
and its agencies could have a material adverse effect on our
earnings.
The Federal Reserve regulates the supply of money and
credit in the U.S. Its policies significantly impact the cost of
funds for lending and investing and the return earned on those
loans and investments, both of which affect our net interest
margin. They can also materially affect the value of financial
assets we hold, such as debt securities, hedging instruments such
as swaps, and servicing rights. Federal Reserve policies can also
adversely affect borrowers, potentially increasing the risk that
they may fail to repay their loans, or could adversely create asset
bubbles which result from prolonged periods of accommodative
policy, and which can in turn result in volatile markets and
rapidly declining collateral values. Changes in Federal Reserve
policies are beyond our control and difficult to predict;
consequently, the impact of these changes on our activities and
results of operations is also difficult to predict.
Additionally, certain aspects of recent U.S. federal income
tax reform could have a negative impact on our business. The
2017 Tax Act limited or eliminated certain income tax
deductions, such as the net business interest expense deduction,
the home mortgage interest deduction, and the deduction of
interest on home equity loans. The limitation or elimination of
8
these deductions, especially those that limit or eliminate the
deductibility of interest paid on loans, could adversely affect
demand for certain types of our products, such as home equity
loans.
Our financial results have been, and may continue to be,
materially affected by general economic conditions, and a
deterioration of economic conditions or of the financial
markets may materially adversely affect our lending and
other businesses and our financial results and condition.
We generate revenue from the interest and fees we charge
on the loans and other products and services we provide, and a
substantial amount of our revenue and earnings come from the
net interest income and fee income that we earn from our
consumer and wholesale businesses. These businesses have
been, and may continue to be, materially affected by the state
of the U.S. economy. Although the U.S. economy has continued
to gradually improve from the severely depressed levels
experienced during the last economic recession, economic
growth has been uneven. In addition, financial uncertainty
stemming from changes in oil and commodity prices, a strong
U.S. dollar, U.S. debt and budget matters, significant central
bank stimulus, a changing interest rate environment in the U.S.,
geopolitical turmoil, uncertainty with regards to the U.S.
political landscape and impacts of any changes in law,
regulation, and policy, deceleration of economic activity in other
large countries, as well as the uncertainty surrounding financial
regulatory reform, have impacted and may continue to impact
the continuing global economic recovery.
A prolonged period of slow growth in the U.S. economy or
in any regional markets that we serve, any deterioration in
economic conditions or the financial markets resulting from the
above matters, or any other events or factors that may disrupt
or dampen the economic recovery, could materially adversely
affect our financial results and condition. Also, any further
deterioration in global economic conditions could slow the
recovery of the domestic economy, negatively impact the
Company’s borrowers or other counterparties that have direct
or indirect exposure to these regions, and/or contribute to a flat
yield curve. Such global disruptions can undermine investor
confidence, cause a contraction of available credit, or create
market volatility, any of which could have significant adverse
effects on the Company’s businesses, results of operations,
financial condition and liquidity, even if the Company’s direct
exposure to the affected region is limited.
Further, if unemployment levels increase or if home prices
decrease, we would expect to incur higher charge-offs and
provision expense from increases in our allowance for credit
losses. These conditions may adversely affect not only consumer
loan performance but also C&I and CRE loans, especially for
those businesses that rely on the health of industries or properties
that may suffer from deteriorating economic conditions. The
ability of these borrowers to repay their loans may be reduced,
causing us to incur higher credit losses.
A deterioration in business and economic conditions may
also erode consumer and investor confidence levels and/or result
in a lower demand for loans by creditworthy customers,
potentially reducing our interest income. It also could adversely
affect financial results for our fee-based businesses, including
our wealth management, investment advisory, trading, and
investment banking businesses. We earn fee income from
managing assets for others and providing brokerage and other
investment advisory and wealth management services. Because
investment management fees are often based on the value of
assets under management, a decrease in the market prices of
those assets could reduce our fee income. Changes in stock or
fixed income market prices or client preferences could affect
the trading activity of investors, reducing commissions and other
fees we earn from our brokerage business. Poor economic
conditions and volatile or unstable financial markets would
likely adversely affect our capital markets-related businesses.
Changes in market interest rates or capital markets could
adversely affect our revenue and expenses, the value of assets
and obligations, and the availability and cost of capital and
liquidity.
Market risk refers to potential losses arising from changes
in interest rates, foreign exchange rates, equity prices,
commodity prices, and other relevant market rates or prices.
Interest rate risk, defined as the exposure of net interest income
and MVE to adverse movements in interest rates, is our primary
market risk, and mainly arises from the nature of the loans and
interest-bearing liabilities on our balance sheet. We are also
exposed to market risk in our trading instruments, AFS
investment portfolio, residential MSRs, loan warehouse and
pipeline, and debt and brokered deposits measured at fair value.
Our ALCO meets regularly and is responsible for reviewing our
open positions and establishing policies to monitor and limit
exposure to market risk. The policies established by ALCO are
reviewed and approved by our Board. See additional discussion
of changes in market interest rates in the "Market Risk
Management” section of Item 7, MD&A, in this Form 10-K.
Given our business mix, and the fact that most of our assets
and liabilities are financial in nature, we tend to be sensitive to
market interest rate movements and the performance of the
financial markets. In addition to the impact of the general
economy, changes in interest rates or in valuations in the debt
or equity markets could directly impact us in one or more of the
following ways:
• The yield on earning assets and rates paid on interest-
bearing liabilities may change in disproportionate ways; or
• The value of certain on-balance sheet and off-balance sheet
financial instruments that we hold could change adversely.
Our net interest income is the interest we earn on loans, debt
securities, and other assets we hold less the interest we pay on
our deposits, long-term and short-term debt, and other liabilities.
Net interest income is a function of both our net interest margin
(the difference between the yield we earn on our earning assets
and the interest rate we pay for deposits and our other sources
of funding) and the amount of earning assets we hold. Changes
in either our net interest margin or the amount of earning assets
we hold could affect our net interest income and our earnings.
Changes in interest rates can affect our net interest margin.
Although the yield we earn on our assets and our funding costs
tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing
our net interest margin to expand or contract. When interest rates
9
rise, our funding costs may rise faster than the yield we earn on
our assets, causing our net interest margin to contract. Higher
interest rates may also tend to result in lower mortgage
production income and elevated charge-offs in certain segments
of the loan portfolio, such as CRE, leveraged lending, credit
card, and home equity.
The amount and type of earning assets we hold can affect
our yield and net interest margin. We hold earning assets in the
form of loans and investment securities, among other assets. As
noted above, if economic conditions deteriorate, we may see
lower demand for loans by creditworthy customers, reducing
our interest income. In addition, we may invest in lower yielding
investment securities for a variety of reasons.
Changes in the slope of the yield curve could also reduce
our net interest margin. Normally, the yield curve is upward
sloping, meaning short-term rates are lower than long-term
rates. The interest we earn on our assets and our costs to fund
those assets may be affected by changes in market interest rates,
changes in the slope of the yield curve, and our cost of funding.
This could lower our net interest margin and our net interest
income. We discuss these topics in greater detail in the
“Enterprise Risk Management” and “Net Interest Income/
Margin” sections of Item 7, MD&A, in this Form 10-K.
We assess our interest rate risk by estimating the effect on
our earnings under various scenarios that differ based on
assumptions about the direction, magnitude, and speed of
interest rate changes and the slope of the yield curve. We hedge
some of that interest rate risk with interest rate derivatives. These
hedges may not be effective and may cause volatility or losses
in our net interest income.
Interest rates on our outstanding financial instruments
to change based on regulatory
might be subject
developments, which could adversely affect our revenue,
expenses, and the value of those financial instruments.
LIBOR and certain other “benchmarks” are the subject of
recent national, international, and other regulatory guidance and
proposals for reform. These reforms may cause such
benchmarks to perform differently than in the past or have other
consequences which cannot be predicted. On July 27, 2017, the
United Kingdom’s Financial Conduct Authority, which
regulates LIBOR, publicly announced that it intends to stop
persuading or compelling banks to submit LIBOR rates after
2021. It is unclear whether, at that time, LIBOR will cease to
exist or if new methods of calculating LIBOR will be
established. If LIBOR ceases to exist or if the methods of
calculating LIBOR change from current methods for any reason,
interest rates on our floating rate obligations, loans, deposits,
derivatives, and other financial instruments tied to LIBOR rates,
as well as the revenue and expenses associated with those
financial instruments, may be adversely affected. Further, any
uncertainty regarding the continued use and reliability of
LIBOR as a benchmark interest rate could adversely affect the
value of our floating rate obligations, loans, deposits,
derivatives, and other financial instruments tied to LIBOR rates.
Our earnings may be affected by volatility in mortgage
production and servicing revenues, and by changes in
carrying values of our servicing assets and mortgages held
for sale due to changes in interest rates.
We earn revenue from originating mortgage loans and from
fees for servicing loans. When rates rise, the demand for
mortgage loans usually tends to fall, reducing the revenue we
receive from loan originations.
in
interest
Changes
rates can affect prepayment
assumptions, and thus, the fair value of our residential MSRs.
A servicing right is the right to service a loan (collect principal,
interest, and escrow amounts) for a fee. When interest rates fall,
borrowers are usually more likely to prepay their loans by
refinancing them at a lower rate. As the likelihood of prepayment
increases, the fair value of our residential MSRs can decrease.
We regularly evaluate the fair value of our residential MSRs and
any related hedges, and any net decrease in the fair value reduces
the fair value of the MSR asset, which in turn reduce earnings
in the period in which the fair value reduction occurs.
Similarly, we measure at fair value mortgages held for sale
for which an active secondary market and readily available
market prices exist. Similar to other interest-bearing securities,
the value of these mortgages held for sale may be adversely
affected by changes in interest rates. For example, if market
interest rates increase relative to the yield on these mortgages
held for sale and other interests, their fair value may fall. For
additional information, see the “Enterprise Risk Management
—Other Market Risk” and “Critical Accounting Policies”
sections of Item 7, MD&A, and Note 9, “Goodwill and Other
Intangible Assets,” to the Consolidated Financial Statements in
this Form 10-K.
We use financial instruments, including derivatives, to
hedge the risk of changes in the fair value of mortgage loans
held for sale and the fair value of residential MSRs, exclusive
of decay. These hedges may not be effective and may cause
volatility, or losses, in our net interest income, mortgage
production and mortgage servicing income. We generally do not
hedge all of our risk, and we may not be successful in hedging
any of the risk. Hedging is a complex process, requiring
sophisticated models and constant monitoring and re-balancing.
We may use hedging instruments tied to U.S. Treasury rates,
LIBOR, or Eurodollars that may not perfectly correlate with the
value or income being hedged. We could incur significant losses
from our hedging activities. There may be periods where we
elect not to use derivatives and other instruments to hedge
interest rate risk. For additional information, see Note 17,
“Derivative Financial Instruments,” to the Consolidated
Financial Statements in this Form 10-K.
Disruptions in our ability to access global capital markets
may adversely affect our capital resources and liquidity.
In managing our consolidated balance sheet, we depend on
access to global capital markets to provide us with sufficient
capital resources and liquidity to meet our commitments and
business needs, and to accommodate the transaction and cash
management needs of our clients. Other sources of contingency
funding available to us include inter-bank borrowings,
repurchase agreements, FHLB capacity, and borrowings from
the Federal Reserve discount window. Any occurrence that may
limit our access to the capital markets, such as a decline in the
confidence of debt investors, our depositors or counterparties
10
participating in the capital markets, or a downgrade of any of
our debt ratings, may adversely affect our funding costs and our
ability to raise funding and, in turn, our liquidity.
Credit Risks
We are subject to credit risk.
When we lend money, commit to lend money or enter into
a letter of credit or other contract with a counterparty, we incur
credit risk, which is the risk of losses if our borrowers do not
repay their loans or if our counterparties fail to perform
according to the terms of their contracts. A number of our
products expose us to credit risk, including loans, leveraged
loans, leases and lending commitments, derivatives, trading
assets, insurance arrangements with respect to such products,
and assets held for sale. The credit quality of our portfolio can
have a significant impact on our earnings. We estimate and
establish reserves for credit risks and credit losses inherent in
our credit exposure (including unfunded credit commitments).
This process, which is critical to our financial results and
condition,
requires difficult, subjective, and complex
judgments, including about how economic conditions might
impair the ability of our borrowers to repay their loans. As is
the case with any such assessments, there is always the chance
that we will fail to identify the proper factors or that we will fail
to accurately estimate the impacts of factors that we do identify.
We might underestimate the credit losses inherent in our
loan portfolio and have credit losses in excess of the amount
reserved. We might increase the allowance because of changing
economic conditions, including falling real estate or commodity
prices and higher unemployment, or other factors such as
changes in borrower behavior. As an example, borrowers may
discontinue making payments on their real estate-secured loans
if the value of the real estate is less than what they owe, even if
they are still financially able to make the payments.
Also, to the extent we increase our consumer credit
portfolio, we may be subject to greater risk than we have
experienced in the past since such loans typically are unsecured
and may be subject to greater fraud risk to the extent such loans
are originated online.
While we believe that our allowance for credit losses was
appropriate at December 31, 2017, there is no assurance that it
will be sufficient to cover all incurred credit losses. In the event
of significant deterioration in economic conditions, we may be
required to increase reserves in future periods, which would
reduce our earnings and potentially capital. For additional
information, see
the “Risk Management—Credit Risk
Management” and “Critical Accounting Policies—Allowance
for Credit Losses” sections of Item 7, MD&A, in this Form 10-
K.
We may have more credit risk and higher credit losses to the
extent that our loans are concentrated by loan type, industry
segment, borrower type, or location of the borrower or
collateral.
Our credit risk and credit losses can increase if our loans
are concentrated in borrowers engaged in the same or similar
activities or in borrowers who as a group may be uniquely or
disproportionately affected by economic or market conditions.
Deterioration in economic conditions, housing conditions, or
real estate values in the markets in which we operate could result
in materially higher credit losses. For additional information,
see the “Loans,” “Allowance for Credit Losses,” “Risk
Management—Credit Risk Management,” and “Critical
Accounting Policies—Allowance for Credit Losses” sections of
Item 7, MD&A, and Notes 6 and 7, “Loans” and “Allowance
for Credit Losses,” to the Consolidated Financial Statements in
this Form 10-K.
Liquidity Risks
We rely on the mortgage secondary market and GSEs for
some of our liquidity.
We sell most of the mortgage loans that we originate to
reduce our credit risk and to provide funding for additional loans.
We rely on GSEs to purchase loans that meet their conforming
loan requirements. Investor demand for nonconforming loans
has fallen sharply, resulting in decreased origination of non-
conforming loans, which reduces our revenue. When we retain
a loan, not only do we keep the credit risk of the loan, but we
also do not receive any sale proceeds that could be used to
generate new loans. A persistent lack of liquidity could limit our
ability to fund and thus originate new mortgage loans, reducing
the fees we earn from originating and servicing loans. In
addition, we cannot provide assurance that GSEs will not
materially limit their purchases of conforming loans due to
capital constraints or change their criteria for conforming loans
(e.g., maximum loan amount or borrower eligibility). Proposals
have been presented to reform the housing finance market in the
U.S., including the role of the GSEs in the housing finance
market. The extent and timing of any such regulatory reform of
the housing finance market and the GSEs, as well as any effect
on our business and financial results, are uncertain.
Loss of customer deposits could increase our funding costs.
We rely heavily on bank deposits as a low cost and stable
source of funding for the loans we make. We compete with banks
and other financial services companies for deposits. If our
competitors raise the rates they pay on deposits, our funding
costs may increase, either because we raise our rates to avoid
losing deposits or because we lose deposits and must rely on
more expensive sources of funding. Also, clients could pursue
alternatives to bank deposits if clients perceive alternative
investments as providing superior expected returns. When
clients move money out of bank deposits in favor of alternative
investments, we can lose a relatively inexpensive source of
funds, increasing our funding costs. Clients typically move
money from bank deposits to alternatives during a rising interest
rate environment, an environment that the U.S. is currently
experiencing and one that is expected to continue over the
medium-term. Higher funding costs reduce our net interest
margin and net interest income.
Any reduction in our credit rating could increase the cost of
our funding from the capital markets.
The rating agencies regularly evaluate us, and their ratings
are based on a number of factors, including our financial strength
as well as factors not entirely within our control, including
11
conditions affecting the financial services industry generally.
Our failure to maintain those ratings could adversely affect the
cost and other terms upon which we are able to obtain funding
and increase our cost of capital. Credit ratings are one of
numerous factors that influence our funding costs. A credit
downgrade might also affect our ability to attract or retain
deposits from commercial and corporate customers and our
ability to conduct derivatives business with certain clients and
counterparties and could trigger obligations by us to make cash
payments to certain clients and counterparties. See the
“Liquidity Risk Management” section of Item 7, MD&A, in this
Form 10-K.
Legal Risks
We are subject to litigation, and our expenses related to this
litigation may adversely affect our results.
From time to time we are subject to litigation in the course
of our business. These claims and legal actions, including
supervisory actions by our regulators, could involve large
monetary claims and significant defense costs. Both the number
of cases and our expenses related to those cases increased as a
result of the Great Recession. The outcome of some of these
cases is uncertain.
We establish reserves for legal claims when payments
associated with the claims become probable and the costs can
be reasonably estimated. We may incur legal costs for a matter
even if we have not established a reserve. In addition, the actual
cost of resolving a legal claim may be substantially higher than
any amounts reserved for that matter. The ultimate resolution of
a pending legal proceeding, depending on the remedy sought
and granted, could materially adversely affect our results of
operations and financial condition.
Substantial legal liability or significant regulatory action
against us could have material adverse financial effects or cause
significant reputational harm to us, which in turn could seriously
harm our business prospects. We may be exposed to substantial
uninsured liabilities, which could adversely affect our results of
operations and financial condition. For additional information,
see Note 19, “Contingencies,” to the Consolidated Financial
Statements in this Form 10-K.
We may
incur fines, penalties and other negative
consequences from regulatory violations, possibly even
inadvertent or unintentional violations.
We maintain systems and procedures designed to ensure
that we comply with applicable laws and regulations, but there
can be no assurance that these will be effective. In addition to
fines and penalties, we may suffer other negative consequences
from regulatory violations including restrictions on certain
activities, such as our mortgage business, which may affect our
relationship with the GSEs and may also damage our reputation,
and this in turn might materially affect our business and results
of operations.
Further, some legal/regulatory frameworks provide for the
imposition of fines or penalties for noncompliance even though
the noncompliance was inadvertent or unintentional and even
though there were in place at the time systems and procedures
designed to ensure compliance. For example, we are subject to
regulations issued by OFAC that prohibit financial institutions
from participating in the transfer of property belonging to the
governments of certain foreign countries and designated
nationals of those countries. OFAC may impose penalties for
inadvertent or unintentional violations even if reasonable
processes are in place to prevent the violations. Additionally,
federal regulators have pursued financial institutions with
emerging theories of recovery under the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).
Courts may uphold significant additional penalties on financial
institutions, even where the financial institution had already
reimbursed the government or other counterparties for actual
losses.
Other Business Risks
We are subject to certain risks related to originating and
selling mortgages. We may be required to repurchase
mortgage loans or indemnify mortgage loan purchasers as
a result of breaches of representations and warranties, or
borrower fraud, and this could harm our liquidity, results
of operations, and financial condition.
We originate and often sell mortgage loans. When we sell
mortgage loans, whether as whole loans or pursuant to a
to make customary
required
securitization, we are
representations and warranties to the purchaser about the
mortgage loans and the manner in which they were originated.
An increase in the number of repurchase and indemnity demands
from purchasers related to representations and warranties on
loans sold could result in an increase in the amount of losses for
loan repurchases.
Also, the Company bears a risk of loss of up to one-third
of the incurred losses resulting from borrower defaults for multi-
family commercial mortgage loans that the Company sells to
Fannie Mae (and that Pillar sold to Fannie Mae prior to
SunTrust’s acquisition of Pillar). See the discussion of
“Commercial Mortgage Loan Loss Share Guarantee” in Note
16, “Guarantees,” to the Consolidated Financial Statements in
this Form 10-K for additional information.
In addition to repurchase claims from the GSEs, we have
received indemnification claims from, and in some cases, have
been sued by, non-GSE purchasers of our loans. These claims
allege that we sold loans that failed to conform to statements
regarding the quality of the mortgage loans sold, the manner in
which the loans were originated and underwritten, and the
compliance of the loans with state and federal law. See additional
discussion
in Note 16, “Guarantees,” and Note 19,
“Contingencies,” to the Consolidated Financial Statements in
this Form 10-K.
We face risks as a servicer of loans.
We act as servicer and/or master servicer for mortgage loans
included in securitizations and for unsecuritized mortgage loans
owned by investors. As a servicer or master servicer for those
loans, we have certain contractual obligations
the
securitization trusts, investors or other third parties, including,
in our capacity as a servicer, foreclosing on defaulted mortgage
loans or, to the extent consistent with the applicable
investor agreement, considering
securitization or other
to
12
alternatives to foreclosure such as loan modifications or short
sales and, in our capacity as a master servicer, overseeing the
servicing of mortgage loans by the servicer. Generally, our
servicing obligations are set by contract, for which we receive
a contractual fee. However, GSEs can amend their servicing
guidelines, which can increase the scope or costs of the services
we are required to perform without any corresponding increase
in our servicing fee. Further, the CFPB has implemented national
servicing standards which have increased the scope and costs
of services which we are required to perform. In addition, there
has been a significant increase in state laws that impose
additional servicing requirements that increase the scope and
cost of our servicing obligations. Also, as a servicer, we advance
expenses on behalf of investors which we may be unable to
collect.
If we commit a material breach of our obligations as servicer
or master servicer, we may be subject to termination if the breach
is not cured within a specified period of time following notice,
which can generally be given by the securitization trustee or a
specified percentage of security holders, causing us to lose
servicing income. In addition, we may be required to indemnify
the securitization trustee against losses from any failure by us,
as a servicer or master servicer, to perform our servicing
obligations or any act or omission on our part that involves
willful misfeasance, bad faith, or gross negligence. For certain
investors and/or certain transactions, we may be contractually
obligated to repurchase a mortgage loan or reimburse the
investor for credit losses incurred on the loan as a remedy for
servicing errors with respect to the loan. If we experience
increased repurchase obligations because of claims that we did
not satisfy our obligations as a servicer or master servicer, or
increased loss severity on such repurchases, we may have to
materially increase our repurchase reserve.
We also have received indemnification requests related to
our servicing of loans owned or insured by other parties,
primarily GSEs. Typically, such a claim seeks to impose a
compensatory fee on us for departures from GSE service levels.
In most cases, this is related to delays in the foreclosure process.
Additionally, we have received indemnification requests where
an investor or insurer has suffered a loss due to a breach of the
servicing agreement. While the number of such claims has been
small, these could increase in the future. See additional
discussion in Note 16, “Guarantees,” to the Consolidated
Financial Statements in this Form 10-K.
Consumers and small businesses may decide not to use banks
to complete their financial transactions, which could affect
net income.
Technology, “FinTech” start-ups, increased use of peer-to-
peer and other technology-based lenders, and other changes now
allow parties to complete financial transactions and obtain
certain loan products without banks. For example, consumers
and small businesses can pay bills, transfer funds, and borrow
money without banks. This could result in the loss of fee income,
the loss of client deposits, and consumer and small business loan
balances and the income generated from those deposits and
loans.
We have businesses other than banking which subject us to
a variety of risks.
We are a diversified financial services company, which we
consider a positive in that it may enhance our growth prospects
and may reduce our overall volatility. However, this diversity
subjects our earnings to a broader variety of risks and
uncertainties than if we were a less diversified company. Other
businesses in addition to banking that we operate include
investment banking, securities underwriting and market
making, loan syndications, investment management and advice,
and retail and wholesale brokerage services offered through our
subsidiaries. These businesses entail significant market,
operational, credit, legal, and other risks that could materially
adversely impact us and our results of operations.
Negative public opinion could damage our reputation and
adversely impact business and revenues.
As a financial institution, our earnings and capital are
subject to risks associated with negative public opinion. The
reputation of the financial services industry, in general, has been
damaged as a result of the most recent financial crisis and other
matters affecting the financial services industry, including
mortgage foreclosure issues and recent sales-practices scandals.
Negative public opinion regarding us could result from our
actual or alleged conduct in any number of activities, including
lending practices, a breach of client information, the failure of
any product or service sold by us to meet our clients' expectations
or applicable regulatory requirements, corporate governance
and acquisitions, or from actions taken by government
regulators and community organizations in response to those
activities. Negative public opinion can adversely affect our
ability to attract and/or retain clients and personnel and can
expose us to litigation and regulatory action. Actual or alleged
conduct by one of our businesses can result in negative public
opinion about our other businesses. Actual or alleged conduct
by another financial institution can result in negative public
opinion about the financial services industry in general and, as
a result, adversely affect us.
We may face more intense scrutiny of our sales, training,
and incentive compensation practices.
We face increased scrutiny of our consumer sales practices,
training practices,
incentive compensation design and
governance, and quality assurance and customer complaint
resolution practices. Although we have invested significant
resources enhancing these processes in recent years, there can
be no assurance that our processes or their results will meet
regulatory standards or expectations. Findings from self-
identified or regulatory reviews may require responsive actions,
including increased investments in compliance systems and
personnel, or the payment of fines, penalties, increased
regulatory assessments, or client redress, and may increase legal
or reputational risk exposures.
We rely on other companies to provide key components of
our business infrastructure.
Third parties provide key components of our business
infrastructure, such as banking services, processing, and internet
connections and network access. Any disruption in such services
13
provided by these third parties or any failure of these third parties
to handle current or higher volumes of use could adversely affect
our ability to deliver products and services to clients and
otherwise to conduct business. Technological or financial
difficulties of a third party service provider could adversely
affect our business to the extent those difficulties result in the
interruption or discontinuation of services provided by that
party. Further, in some instances we may be responsible for
failures of such third parties to comply with government
regulations. We may not be insured against all types of losses
as a result of third party failures, and our insurance coverage
may be inadequate to cover all losses resulting from system
failures or other disruptions. Failures
in our business
infrastructure could interrupt the operations or increase the costs
of doing business.
Competition in the financial services industry is intense and
we could lose business or suffer margin declines as a result.
We operate in a highly competitive industry that could
become even more competitive as a result of reform of the
financial services industry resulting from the Dodd-Frank Act
and other legislative, regulatory, and technological changes, and
from continued consolidation. We face aggressive competition
from other domestic and foreign lending institutions and from
numerous other providers of financial services. The ability of
nonbanking financial institutions to provide services previously
limited to commercial banks has intensified competition.
Because nonbanking financial institutions are not subject to the
same regulatory restrictions as banks and bank holding
companies, they can often operate with greater flexibility and
lower cost structures. Securities firms and insurance companies
that have elected to become financial holding companies can
offer virtually any type of financial service, including banking,
securities underwriting,
(both agency and
underwriting), and merchant banking, and may acquire banks
and other financial institutions. These new competitors have
significantly changed the competitive environment in which we
conduct business. Some of our competitors have greater
financial resources and/or face fewer regulatory constraints. As
a result of these various sources of competition, we could lose
business to competitors or be forced to price products and
services on less advantageous terms to retain or attract clients,
either of which would adversely affect our profitability.
insurance
We continually encounter technological change and must
effectively develop and implement new technology.
The financial services industry is undergoing rapid
technological change with frequent introductions of new
technology-driven products and services. We have invested in
technology and connectivity to automate functions previously
performed manually, to facilitate the ability of customers to
engage in financial transactions, and otherwise to enhance the
customer experience with respect to our products and services.
On the retail side, this has included developments such as more
sophisticated ATMs and expanded access
to banking
transactions through the internet, smart phones, tablets and other
remote devices. This has allowed us to better serve our clients
and to reduce costs. Our continued success depends, in part,
upon our ability to address the needs of our customers by using
technology to provide products and services that satisfy
customer demands, including demands for faster and more
secure payment services, to create efficiencies in our operations,
and to integrate those offerings with legacy platforms or to
update those legacy platforms. A failure to maintain or enhance
our competitive position with respect to technology, whether
because we fail to anticipate customer expectations or because
our technological developments fail to perform as desired or are
not rolled out in a timely manner, may cause us to lose market
share or incur additional expense.
Maintaining or increasing market share depends on market
acceptance and regulatory approval of new products and
services.
Our success depends, in part, on our ability to adapt
products and services to evolving market and industry standards.
The widespread adoption of new technologies has required, and
likely will continue to require, us to make substantial capital
expenditures to modify or adapt existing products and services
or develop new products and services. In addition, there is
increasing pressure to provide products and services at lower
prices. This can reduce net interest income and noninterest
income from fee-based products and services. We may not be
successful in introducing new products and services in response
to industry trends or developments in technology, or those new
products may not achieve market acceptance. As a result, we
could lose business, be forced to price products and services on
less advantageous terms to retain or attract clients, or be subject
to cost increases, any of which would adversely affect our
profitability.
We have in the past and may in the future pursue
acquisitions, which could affect costs and from which we
may not be able to realize anticipated benefits.
We have historically pursued acquisitions, and may seek
acquisitions in the future. We may not be able to successfully
identify suitable candidates, negotiate appropriate acquisition
terms, complete proposed acquisitions, successfully integrate
acquired businesses into the existing operations, or expand into
new markets. Once integrated, acquired operations may not
achieve levels of revenues, profitability, or productivity
comparable with those achieved by our existing operations, or
otherwise perform as expected.
Acquisitions involve numerous risks, including difficulties
in the integration of the operations, technologies, services, and
products of the acquired companies, and the diversion of
management's attention from other business concerns. We may
not properly ascertain all such risks prior to an acquisition or
prior to such a risk impacting us while integrating an acquired
company. As a result, difficulties encountered with acquisitions
could have a material adverse effect on our business, financial
condition, and results of operations.
Furthermore, we must generally receive federal regulatory
approval before we can acquire a bank or BHC. In determining
whether to approve a proposed bank acquisition, federal bank
regulators will consider, among other factors, the effect of the
acquisition on competition,
future
prospects, including current and projected capital levels, the
integrity of management,
competence, experience, and
financial condition,
14
compliance with laws and regulations, the convenience and
needs of the communities to be served, including the acquiring
institution's record of compliance under the CRA, and the
effectiveness of the acquiring institution in combating money
laundering activities. We cannot be certain when or if, or on
what terms and conditions, any required regulatory approvals
will be granted. Consequently, we might be required to sell
portions of the acquired institution as a condition to receiving
regulatory approval or we may not obtain regulatory approval
for a proposed acquisition on acceptable terms or at all, in which
case we would not be able to complete the acquisition despite
the time and expenses invested in pursuing it.
We depend on the expertise of key personnel. If these
individuals leave or change their roles without effective
replacements, operations may suffer.
Our success depends, to a large degree, on the continued
services of executive officers and other key personnel who have
extensive experience in the industry. We generally do not carry
key person life insurance on any of our executive officers or
other key personnel. If we lose the services of any of these
persons and fail to manage a smooth transition to new personnel,
our business could be adversely impacted.
We may not be able to hire or retain additional qualified
personnel and recruiting and compensation costs may
increase as a result of changes in the marketplace, both of
which may increase costs and reduce profitability and may
adversely impact our ability to implement our business
strategies.
Our success depends upon the ability to attract and retain
highly motivated, well-qualified personnel. We face significant
competition in the recruitment of qualified employees. Our
ability to execute our business strategy and provide high quality
service may suffer if we are unable to recruit or retain a sufficient
number of qualified employees or if the costs of employee
compensation or benefits increase substantially. Further, in June
2010, the Federal Reserve and other federal banking regulators
jointly issued comprehensive final guidance designed to ensure
that incentive compensation policies do not undermine the
safety and soundness of banking organizations by encouraging
employees to take imprudent risks. This regulation significantly
affects the amount, form, and context in which we pay incentive
compensation. Additionally, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance
Corporation, and the SEC have jointly proposed rules which
affect incentive compensation. These rules, if finalized, may
adversely affect us by imposing costs and restrictions on certain
of our businesses which are not imposed on non-bank
competitors.
Other Risks
Our framework for managing risks may not be effective in
mitigating risk and loss to us.
Our risk management framework seeks to mitigate risk and
loss to us. We have established processes and procedures
intended to identify, measure, monitor, report and analyze the
types of risk to which we are subject, including liquidity risk,
15
credit risk, market risk, interest rate risk, operational risk,
reputational risk, and legal, model and compliance risk, among
others. However, as with any risk management framework, there
are inherent limitations to our risk management strategies as
risks may exist, or develop in the future, that we have not
appropriately anticipated or identified. The most recent financial
crisis and resulting regulatory reform highlighted both the
limitations of managing
the
importance and some of
unanticipated risks. If our risk management framework proves
ineffective, we could suffer unexpected losses and could be
materially adversely affected.
Our controls and procedures may not prevent or detect all
errors or acts of fraud.
Our controls and procedures are designed to provide
reasonable assurance that information required to be disclosed
by us in reports we file or submit under the Exchange Act is
accurately accumulated and communicated to management, and
recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms. We believe that
any disclosure controls and procedures or internal controls and
procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met, due to certain inherent
that
limitations. These
judgments in decision making can be faulty, that alternative
reasoned judgments can be drawn, or that breakdowns can occur
because of a simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people or by an unauthorized override
of the controls. Accordingly, because of the inherent limitations
in our control system, misstatements due to error or fraud may
occur and not be detected, which could result in a material
weakness in our internal controls over financial reporting and/
or the restatement of previously filed financial statements.
the realities
limitations
include
We are at risk of increased losses from fraud.
Criminals committing fraud increasingly are using more
sophisticated techniques and in some cases are part of larger
criminal rings, which allow them to be more effective.
Fraudulent activity has taken many forms and escalates as
more tools for accessing financial services emerge, such as real-
time payments. Fraud schemes are broad and continuously
evolving and include such things as debit card/credit card fraud,
check fraud, mechanical devices attached to ATM machines,
social engineering and phishing attacks to obtain personal
information, or impersonation of our clients through the use of
falsified or stolen credentials. Additionally, an individual or
business entity may properly identify themselves, yet seek to
establish a business relationship for the purpose of perpetrating
fraud. An emerging type of fraud even involves the creation of
synthetic identification in which fraudsters “create” individuals
for the purpose of perpetrating fraud. Further, in addition to
fraud committed against us, we may suffer losses as a result of
fraudulent activity committed against third parties. Increased
deployment of technologies, such as chip card technology,
defray and reduce aspects of fraud; however, criminals are
turning to other sources to steal personally identifiable
information, such as unaffiliated healthcare providers and
government entities, in order to impersonate the consumer to
commit fraud. Many of these data compromises have been
widely reported in the media. Further, as a result of the increased
sophistication of fraud activity, we have increased our spending
on systems and controls to detect and prevent fraud. This will
result in continued ongoing investments in the future.
Our operational and communications systems and
infrastructure may fail or may be the subject of a breach or
cyber-attack that, if successful, could adversely affect our
business and disrupt business continuity.
We depend on our ability to process, record, and monitor a
large number of client transactions and to communicate with
clients and other institutions on a continuous basis. As client,
industry, public, and regulatory expectations regarding
operational and information security have increased, our
operational systems and
to be
safeguarded and monitored for potential failures, disruptions,
and breakdowns, whether as a result of events beyond our
control or otherwise.
infrastructure continue
Our business, financial, accounting, data processing, or
other operating systems and facilities may stop operating
properly or become disabled or damaged as a result of a number
of factors, including events that are wholly or partially beyond
our control. For example, there could be sudden increases in
client transaction volume; electrical or telecommunications
outages; natural disasters such as earthquakes, tornadoes,
floods, and hurricanes; disease pandemics; events arising from
local or larger scale political or social matters, including terrorist
acts; occurrences of employee error, fraud, or malfeasance; and,
as described below, cyber-attacks.
Although we have business continuity plans and other
safeguards in place, our operations and communications may
be adversely affected by significant and widespread disruption
to our systems and infrastructure that support our businesses and
clients. While we continue to evolve and modify our business
continuity plans, there can be no assurance in an escalating threat
environment that they will be effective in avoiding disruption
and business impacts. Our insurance may not be adequate to
compensate us for all resulting losses, and the cost to obtain
adequate coverage may increase for us or the industry.
to conduct
technologies
Security risks for financial institutions such as ours have
dramatically increased in recent years in part because of the
proliferation of new technologies, the use of the internet and
financial
telecommunications
transactions, and the increased sophistication, resources and
activities of hackers, terrorists, activists, organized crime, and
other external parties, including nation state actors. In addition,
to access our products and services, clients may use devices or
software that are beyond our control environment, which may
provide additional avenues for attackers to gain access to
confidential information. Although we have information
security procedures and controls in place, our technologies,
systems, networks, and clients' devices and software may
become the target of cyber-attacks or information security
breaches that could result in the unauthorized release, gathering,
monitoring, misuse, loss, change, or destruction of our or our
information
clients' confidential, proprietary and other
(including personal identifying information of individuals), or
otherwise disrupt our or our clients' or other third parties'
business operations. Other U.S. financial institutions and
financial service companies have reported breaches in the
security of their websites or other systems, including attempts
to shut down access to their networks and systems in an attempt
to extract compensation from them to regain control. Financial
institutions, including SunTrust, have experienced distributed
denial-of-service attacks, a sophisticated and targeted attack
intended to disable or degrade internet service or to sabotage
systems.
We and others in our industry are regularly the subject of
attempts by attackers to gain unauthorized access to our
networks, systems, and data, or to obtain, change, or destroy
confidential data (including personal identifying information of
individuals) through a variety of means, including computer
viruses, malware, and phishing. In the future, these attacks may
result in unauthorized individuals obtaining access to our
confidential information or that of our clients, or otherwise
accessing, damaging, or disrupting our
systems or
infrastructure.
We are continuously developing and enhancing our
controls, processes, and practices designed to protect our
systems, computers, software, data, and networks from attack,
damage, or unauthorized access. This continued development
and enhancement will require us to expend additional resources,
including to investigate and remediate any information security
vulnerabilities that may be detected. Despite our ongoing
investments in security resources, talent, and business practices,
we are unable to assure that any security measures will be
effective.
If our systems and infrastructure were to be breached,
damaged, or disrupted, or if we were to experience a loss of our
confidential information or that of our clients, we could be
subject to serious negative consequences, including disruption
of our operations, damage to our reputation, a loss of trust in us
on the part of our clients, vendors or other counterparties, client
attrition, reimbursement or other costs, increased compliance
costs, significant litigation exposure and legal liability, or
regulatory fines, penalties or intervention. Any of these could
materially and adversely affect our results of operations, our
financial condition, and/or our share price.
A disruption, breach, or failure in the operational systems
and infrastructure of our third party vendors and other
service providers, including as a result of cyber-attacks,
could adversely affect our business.
Third parties perform significant operational services on
our behalf. These third parties with whom we do business or
that facilitate our business activities, including exchanges,
clearing houses, central clearing counterparties, financial
intermediaries, or vendors that provide services or security
solutions for our operations, could also be sources of operational
and information security risk to us, including from breakdowns
or failures of their own systems or capacity constraints. In
particular, operating our business requires us to provide access
to client and other sensitive Company information to our
contractors, consultants, and other third parties and authorized
entities. Controls and oversight mechanisms are in place that
are designed to limit access to this information and protect it
16
from unauthorized disclosure, theft, and disruption. However,
control systems and policies pertaining to system access are
subject to errors in design, oversight failure, software failure,
human error, intentional subversion or other compromise
resulting in theft, error, loss, or inappropriate use of information
or systems to commit fraud, cause embarrassment to us or our
executives or to gain competitive advantage. In addition,
regulators expect financial institutions to be responsible for all
aspects of their performance, including aspects which they
delegate to third parties. If a disruption, breach, or failure in the
system or infrastructure of any third party with whom we do
business occurred, our business may be materially and adversely
affected in a manner similar to if our own systems or
infrastructure had been compromised. As has been the case in
other major system events in the U.S., our systems and
infrastructure may also be attacked, compromised, or damaged
as a result of, or as the intended target of, any disruption, breach,
or failure in the systems or infrastructure of any third party with
whom we do business.
Natural disasters and other catastrophic events could have
a material adverse impact on our operations or our financial
condition and results.
The occurrence of catastrophic events, such as hurricanes,
tropical storms, tornados, winter storms, wildfires, earthquakes,
mudslides, floods, and other large scale catastrophes, could
adversely affect our financial condition or results of operations.
We have significant operations and customers along the Gulf
and Atlantic coasts as well as other regions of the U.S., which
could be adversely impacted by hurricanes, tornados, and other
severe weather in those areas. Unpredictable natural and other
disasters could have an adverse effect on us in that such events
could materially disrupt our operations or the ability or
willingness of our customers to access the financial services that
we offer, including adverse impacts on our borrowers to timely
repay their loans and the value of any collateral that we hold.
These events could reduce our earnings and cause volatility in
our financial results for any fiscal quarter or year and have a
material adverse effect on our financial condition or results of
operations.
Although we have business continuity plans and other
safeguards in place, our operations and communications may
be adversely affected by natural disasters or other catastrophic
events and there can be no assurance that such business
continuity plans will be effective.
The soundness of other financial institutions could adversely
affect us.
Our ability to engage in routine funding transactions could
be adversely affected by the actions and commercial soundness
of other financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty, or other
relationships. We have exposure to many different industries
and counterparties, and we routinely execute transactions with
counterparties in the financial industry, including brokers and
dealers, central clearing counterparties, commercial banks,
investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even rumors or
questions about, one or more financial services institutions, or
the financial services industry generally, in the past have led to
market-wide liquidity problems and could lead to losses or
defaults by us or by other institutions. Many of these transactions
expose us to credit risk in the event of default of our counterparty
or client. In addition, our credit risk may be exacerbated when
the collateral held by us cannot be realized or is liquidated at
prices not sufficient to recover the full amount of our exposure.
There is no assurance that any such losses would not materially
and adversely affect our results of operations.
We depend on the accuracy and completeness of information
about clients and counterparties.
In deciding whether to extend credit or enter into other
transactions with clients and counterparties, we may rely on
information furnished by or on behalf of clients and
including financial statements and other
counterparties,
financial information. We also may rely on representations of
clients and counterparties as to the accuracy and completeness
of that information and, with respect to financial statements, on
reports of independent auditors. If the information that we rely
on is not accurate or complete, our decisions about extending
credit or entering into other transactions with clients or
counterparties could be adversely affected, and we could suffer
defaults, credit losses, or other negative consequences as a
result.
Our accounting policies and processes are critical to how we
report our financial condition and results of operation. They
require management to make estimates about matters that
are uncertain.
Accounting policies and processes are fundamental to how
we record and report our financial condition and results of
operation. Some of these policies require use of estimates and
assumptions that may affect the value of our assets or liabilities
and financial results. Several of our accounting policies are
critical because they require management to make difficult,
subjective, and complex judgments about matters that are
inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions
or using different assumptions. Pursuant to U.S. GAAP, we are
required to make certain assumptions and estimates in preparing
our financial statements, including in determining credit loss
reserves, reserves related to litigation and the fair value of certain
assets and liabilities, including the value of goodwill, among
other items. If assumptions or estimates underlying our financial
statements are incorrect, or are adjusted periodically, we may
experience material losses.
Management has identified certain accounting policies as
being critical because they require management's judgment to
ascertain the valuations of assets, liabilities, commitments, and
contingencies. A variety of factors could affect the ultimate
value that is obtained either when earning income, recognizing
an expense, recovering an asset, valuing an asset or liability, or
recognizing or reducing a liability. We have established detailed
policies and control procedures that are intended to ensure these
critical accounting estimates and judgments are well controlled
and applied consistently. In addition, the policies and procedures
are intended to ensure that the process for changing
methodologies occurs in an appropriate manner. Because of the
17
uncertainty surrounding our judgments and the estimates
pertaining to these matters, we cannot guarantee that we will
not be required to adjust accounting policies or restate prior
period financial statements. We discuss these topics in greater
detail in the "Critical Accounting Policies” section of Item 7,
MD&A, and Note 1, “Significant Accounting Policies,” to the
Consolidated Financial Statements in this Form 10-K.
Further, from time to time, the FASB and SEC change the
financial accounting and reporting standards that govern the
preparation of our financial statements. In addition, accounting
standard setters and those who interpret the accounting
their previous
standards may change or even reverse
interpretations or positions on how these standards should be
applied. Changes in financial accounting and reporting
standards and changes in current interpretations may be beyond
our control, can be hard to predict and could materially affect
how we report our financial results and condition. In some cases,
we could be required to apply a new or revised standard
retroactively, resulting in us restating prior period financial
accounting
statements. We
pronouncements, including both those which we have already
adopted in full or in part, and those which we will adopt in the
future, at Note 1, “Significant Accounting Policies,” to the
Consolidated Financial Statements in this Form 10-K.
recently
discuss
issued
Depressed market values for our stock and adverse
economic conditions sustained over a period of time may
require us to write down all or some portion of our goodwill.
Goodwill is tested for impairment by comparing the fair
value of a reporting unit to its carrying value. If the fair value
is greater than the carrying value, then the reporting unit’s
goodwill is not impaired. The fair value of a reporting unit is
impacted by the reporting unit's expected financial performance
and susceptibility to adverse economic, regulatory, and
legislative changes. The estimated fair values of the individual
reporting units are assessed for reasonableness by reviewing a
variety of indicators, including comparing these estimated fair
values to our market capitalization over a reasonable period of
time. While this comparison provides some relative market
information regarding the estimated fair value of the reporting
units, it is not determinative and needs to be evaluated in the
context of the current economic environment. However,
significant and sustained declines in our market capitalization
could be an indication of potential goodwill impairment. See
the "Critical Accounting Policies" section of Item 7, MD&A, in
this Form 10-K for additional information.
Risks Related to Our Common Stock
Our stock price can be volatile.
Our stock price can fluctuate widely in response to a variety
of factors including, but not limited to:
variations in our quarterly results
•
changes in market valuations of companies in the financial
•
services industry
governmental and regulatory legislation or actions
issuances of shares of common stock or other securities in
the future
changes in dividends and capital returns
•
•
•
•
•
•
•
•
the addition or departure of key personnel
cyclical fluctuations
changes in financial estimates or recommendations by
securities analysts regarding us or shares of our common
stock
announcements by us or our competitors of new services
or technology, acquisitions, or joint ventures
activity by short sellers and changing government
restrictions on such activity
General market fluctuations, industry factors, and general
economic and political conditions and events, such as cyber or
terrorist attacks, economic slowdowns or recessions, interest
rate changes, credit loss trends, or currency fluctuations, also
could cause our stock price to decrease regardless of operating
results. For the above and other reasons, the market price of our
securities may not accurately reflect the underlying value of our
securities, and you should consider this before relying on the
market prices of our securities when making an investment
decision.
We might not pay dividends on our stock.
Holders of our stock are only entitled to receive such
dividends that our Board declares out of funds legally available
for such payments. Although we have historically declared cash
dividends on our stock, we are not required to do so.
The Federal Reserve has indicated that increased capital
distributions generally would not be considered prudent in the
absence of a well-developed capital plan and a capital position
that would remain strong even under adverse conditions. As a
result, any increase in our dividend requires a non-objection
from the Federal Reserve.
Additionally, our obligations under the warrant agreements
that we entered into with the U.S. Treasury as part of the CPP
will increase to the extent that we pay dividends on our common
stock prior to December 31, 2018 exceeding $0.54 per share per
quarter, which was the amount of dividends we paid when we
first participated in the CPP. Specifically, the exercise price and
the number of shares to be issued upon exercise of the warrants
will be adjusted proportionately (that is, adversely to us) as
specified in a formula contained in the warrant agreements.
Our ability to receive dividends from our subsidiaries or
other investments could affect our liquidity and ability to
pay dividends.
We are a separate and distinct legal entity from our
subsidiaries, including the Bank. We receive substantially all of
our revenue from dividends from our subsidiaries and other
investments. These dividends are the principal source of funds
to pay dividends on our common stock and interest and principal
on our debt. Various federal and/or state laws and regulations
limit the amount of dividends that our Bank and certain of our
nonbank subsidiaries may pay us. Also, our right to participate
in a distribution of assets upon a subsidiary's liquidation or
reorganization is subject to the prior claims of the subsidiary's
creditors. Limitations on our ability to receive dividends from
our subsidiaries could have a material adverse effect on our
liquidity and on our ability to pay dividends on our common
stock. Additionally, if our subsidiaries' earnings are not
18
sufficient to make dividend payments to us while maintaining
adequate capital levels, we may not be able to make dividend
payments to our common shareholders.
Certain banking laws and certain provisions of our articles
of incorporation may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory
approval requirements, could make it difficult for a third party
to acquire us, even if doing so would be perceived to be
beneficial to our shareholders. Acquisition of 10% or more of
any class of voting stock of a bank holding company or
depository institution, including shares of our common stock,
generally creates a rebuttable presumption that the acquirer
“controls” the bank holding company or depository institution,
and thus, unless the acquirer is able to rebut this presumption,
it would be subject to various laws and regulations that bank
holding companies are subject to. Also, a bank holding company
must obtain the prior approval of the Federal Reserve before,
among other things, acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any bank,
including our bank.
There also are provisions in our amended and restated
articles of incorporation and amended and restated bylaws, such
as limitations on the ability to call a special meeting of our
shareholders, that may be used to delay or block a takeover
attempt. In addition, our Board will be authorized under our
amended and restated articles of incorporation to issue shares
of our preferred stock and to determine the rights, terms,
conditions, and privileges of such preferred stock, without
shareholder approval. These provisions may effectively inhibit
a non-negotiated merger or other business combination.
19
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Our principal executive offices are located in SunTrust Plaza,
Atlanta, Georgia. The 60-story office building is majority-owned
by SunTrust Banks, Inc. At December 31, 2017, the Bank
operated 1,268 full-service banking offices, of which 560 were
owned and the remainder were leased. Full-service banking
offices are located primarily in Florida, Georgia, Virginia, North
Carolina, Tennessee, Maryland, South Carolina, and the District
of Columbia. See Note 8, “Premises and Equipment,” to the
Consolidated Financial Statements in Item 8 of this Form 10-K
for additional information regarding our properties.
Item 3.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to numerous claims
and lawsuits arising in the normal course of its business activities,
some of which involve claims for substantial amounts. Although
the ultimate outcome of these suits cannot be ascertained at this
time, it is the opinion of management that none of these matters,
when resolved, will have a material effect on the Company’s
consolidated results of operations, cash flows, or financial
condition. For additional
see Note 19,
“Contingencies,” to the Consolidated Financial Statements in
Item 8 of this Form 10-K, which is incorporated by reference
into this Item 3.
information,
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
20
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The principal market in which SunTrust common stock is traded
is the NYSE (symbol “STI”). For the quarterly high and low
sales prices of SunTrust common stock for the last two years,
see Table 30 in Item 7 of this Form 10-K, which is incorporated
by reference into this Item 5. During the year ended December
31, 2017, SunTrust paid a quarterly dividend on common stock
of $0.26 per common share for the first and second quarters and
$0.40 per common share for the third and fourth quarters,
compared to a quarterly dividend on common stock of $0.24 per
common share for the first and second quarters of 2016 and $0.26
per common share for the third and fourth quarters of 2016.
SunTrust common stock was held by 21,731 holders of record
at December 31, 2017. See the “Equity Securities” section of
this Item 5 for information on share repurchase activity, publicly
announced plans and programs, and the remaining repurchase
authority under the announced plans and programs.
Please also refer to Item 1, “Business,” for a discussion of
restrictions that may affect SunTrust's ability to pay dividends,
Item 1A, “Risk Factors,” for a discussion of some risks related
to SunTrust's dividends, and the “Capital Resources” section of
Item 7 for a discussion of dividends paid during the year and
factors that may affect future levels of dividends.
The information under the caption “Equity Compensation
Plans” in the Company's definitive Proxy Statement to be filed
with the SEC is incorporated by reference into this Item 5.
The following graph and table compare the cumulative total
shareholder return on SunTrust common stock compared to the
cumulative total return of the S&P 500 Index and the S&P 500
Banks Industry Index for
the five years commencing
December 31, 2012 (at market close) and ending December 31,
2017. The foregoing analysis assumes simultaneous initial
investments of $100 and the reinvestment of all dividends in
SunTrust common stock and in each of the above indices.
SunTrust
S&P 500 Index
S&P 500 Banks Industry Index
Cumulative Total Return for the Years Ended December 31
2012
$100.00
100.00
100.00
2013
$131.08
132.04
135.28
21
2014
$151.69
149.89
155.99
2015
$158.43
151.94
157.27
2016
$206.54
169.82
194.35
2017
$248.19
206.49
237.57
Equity Securities
Issuer purchases of equity securities during the year ended December 31, 2017 are presented in the following table:
January 1 - 31
February 1 - 28
March 1 - 31 2
Total during first quarter of 2017
April 1 - 30
May 1 - 31
June 1 - 30
Total during second quarter of 2017
July 1 - 31
August 1 - 31
September 1 - 30
Total during third quarter of 2017
October 1 - 31
November 1 - 30
December 1 - 31
Total during fourth quarter of 2017
Total Number of
Shares Purchased
—
1,904,300
5,108,154
7,012,454
Average Price
Paid per Share
$—
59.54
58.85
59.04
2,281,000
1,898,455
—
4,179,455
1,721,800
4,045,893
—
5,767,693
—
2,309,008
3,004,832
5,313,840
57.17
57.73
—
57.42
57.14
57.25
—
57.22
—
59.14
64.37
62.10
Common Stock 1
Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
—
1,904,300
2,110,532
4,014,832
2,281,000
1,898,455
—
4,179,455
1,721,800
4,045,893
—
5,767,693
—
2,309,008
3,004,832
5,313,840
Total year-to-date 2017
22,273,442
$58.99
19,275,820
Approximate Dollar Value
of Equity that May Yet Be
Purchased Under the Plans
or Programs at Period End
(in millions)
$480
367
240
240
110
—
—
—
1,222
990
990
990
990
853
660
660
$660
1 During the year ended December 31, 2017, no shares of SunTrust common stock were surrendered by participants in SunTrust's employee stock option plans, where
participants may pay the exercise price upon exercise of SunTrust stock options by surrendering shares of SunTrust common stock that the participant already owns.
SunTrust considers any such shares surrendered by participants in SunTrust's employee stock option plans to be repurchased pursuant to the authority and terms of
the applicable stock option plan rather than pursuant to publicly announced share repurchase programs.
2 During March 2017, the Company repurchased $174 million of its outstanding common stock at market value under the 1% of Tier 1 capital de minimis exception
allowed under the applicable 2016 Capital Plan Rule. This repurchase was incremental to and separate from the $960 million of authorized share repurchases under
the Company's 2016 capital plan submitted in connection with the 2016 CCAR.
During the second quarter of 2017, the Company completed its
authorized repurchases of common equity under the 2016 CCAR
capital plan, which the Company initially announced on June 29,
2016 and which effectively expired on June 30, 2017.
On June 28, 2017, the Company announced that the Federal
Reserve had no objections to the repurchase of up to $1.32 billion
of the Company's outstanding common stock to be completed
between July 1, 2017 and June 30, 2018, as part of the Company's
2017 capital plan submitted in connection with the 2017 CCAR.
During the second half of 2017, the Company repurchased $660
million of its outstanding common stock at market value as part
of this publicly announced 2017 capital plan. At December 31,
2017, the Company had $660 million of remaining common
stock repurchase capacity available under its 2017 capital plan
(reflected in the table above).
At December 31, 2017, a total of 7.1 million Series A and
B warrants to purchase the Company's common stock remained
outstanding. The Series A and B warrants have expiration dates
of December 2018 and November 2018, respectively.
The Company did not repurchase any of its Series A
Preferred Stock Depositary Shares, Series B Preferred Stock,
Series E Preferred Stock Depositary Shares, Series F Preferred
Stock Depositary Shares, Series G Preferred Stock Depositary
Shares, or Series H Preferred Stock Depositary Shares during
the year ended December 31, 2017, and there was no unused
Board authority to repurchase any shares of Series A Preferred
Stock Depositary Shares, Series B Preferred Stock, Series E
Preferred Stock Depositary Shares, Series F Preferred Stock
Depositary Shares, Series G Preferred Stock Depositary Shares,
or the Series H Preferred Stock Depositary Shares. As previously
announced, the Company intends to redeem all outstanding
Series E Preferred Stock Depositary Shares on March 15, 2018
in accordance with the terms of the Series E Preferred Stock
Depositary Shares.
See Note 13, "Capital," to the Consolidated Financial
Statements in Item 8 of this Form 10-K for additional information
regarding the Company's equity securities.
22
Item 6. SELECTED FINANCIAL DATA
(Dollars in millions and shares in thousands, except per share data)
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense 1
Income before provision for income taxes
Provision for income taxes 1
Net income attributable to noncontrolling interest
Net income
Net income available to common shareholders
Adjusted net income available to common shareholders 2
Net interest income-FTE 2
Total revenue
Total revenue-FTE 2
Total adjusted revenue-FTE 2
Net income per average common share:
Diluted
Adjusted diluted 2
Basic
Dividends declared per common share
Book value per common share
Tangible book value per common share 2
Market capitalization
Period End Balances:
Total assets
Earning assets
LHFI
ALLL
Consumer and commercial deposits
Long-term debt
Total shareholders’ equity
Selected Average Balances:
Total assets
Earning assets
LHFI
Intangible assets including residential MSRs
Residential MSRs
Consumer and commercial deposits
Long-term debt
Preferred stock
Total shareholders’ equity
Average common shares - diluted
Average common shares - basic
Financial Ratios:
Effective tax rate 1
ROA
ROE
ROTCE 2
Net interest margin
Net interest margin-FTE 2
Efficiency ratio 1
Efficiency ratio-FTE 1, 2
Tangible efficiency ratio-FTE 1, 2
Adjusted tangible efficiency ratio-FTE 1, 2
Total average shareholders’ equity to total average assets
Tangible common equity to tangible assets 2
Common dividend payout ratio
2017
$6,387
754
5,633
409
5,224
3,354
5,764
2,814
532
9
$2,273
$2,179
$2,179
$5,778
8,987
9,132
9,132
$4.47
4.47
4.53
1.32
47.94
34.82
30,417
$205,962
182,710
143,181
1,735
159,795
9,785
25,154
$204,931
184,212
144,216
8,034
1,615
159,549
11,065
1,792
24,301
486,954
481,339
Year Ended December 31
2015
2016
2014
$5,778
557
5,221
444
4,777
3,383
5,468
2,692
805
9
$1,878
$1,811
$1,811
$5,359
8,604
8,742
8,742
$3.60
3.60
3.63
1.00
45.38
32.95
26,942
$204,875
184,610
143,298
1,709
158,864
11,748
23,618
$199,004
178,825
141,118
7,545
1,190
154,189
10,767
1,225
24,068
503,466
498,638
$5,265
501
4,764
165
4,599
3,268
5,160
2,707
764
10
$1,933
$1,863
$1,863
$4,906
8,032
8,174
8,174
$3.58
3.58
3.62
0.92
43.45
31.45
21,793
$190,817
172,114
136,442
1,752
148,921
8,462
23,437
$188,892
168,813
133,558
7,604
1,250
144,202
10,873
1,225
23,346
520,586
514,844
$5,384
544
4,840
342
4,498
3,323
5,543
2,278
493
11
$1,774
$1,722
$1,729
$4,982
8,163
8,305
8,200
$3.23
3.24
3.26
0.70
41.32
29.62
21,978
$190,328
168,678
133,112
1,937
139,234
13,022
23,005
$182,176
162,189
130,874
7,630
1,255
132,012
12,359
800
22,170
533,391
527,500
2013
$5,388
535
4,853
553
4,300
3,214
5,831
1,683
322
17
$1,344
$1,297
$1,476
$4,980
8,067
8,194
8,257
$2.41
2.74
2.43
0.35
38.39
26.79
19,734
$175,335
156,856
127,877
2,044
127,735
10,700
21,422
$172,497
153,728
122,657
7,535
1,121
127,076
9,872
725
21,167
539,093
534,283
19%
30%
28%
22%
19%
1.11
9.72
13.39
3.06
3.14
64.14
63.12
62.30
61.04
11.86
8.21
29.1
0.94
7.97
10.91
2.92
3.00
63.55
62.55
61.99
61.99
12.09
8.15
27.5
1.02
8.46
11.75
2.82
2.91
64.24
63.13
62.64
62.64
12.36
8.67
25.5
0.97
8.10
11.49
2.98
3.07
67.90
66.74
66.44
63.34
12.17
8.44
21.5
0.78
6.38
9.37
3.16
3.24
72.28
71.16
70.89
65.27
12.27
8.50
14.5
23
Item 6. SELECTED FINANCIAL DATA (continued)
Capital Ratios at period end 3:
CET1 (Basel III)
CET1 - fully phased-in (Basel III) 2
Tier 1 common equity (Basel I)
Tier 1 capital
Total capital
Leverage
2017
9.74%
9.59
N/A
11.15
13.09
9.80
Year Ended December 31
2015
2016
2014
9.59%
9.43
N/A
10.28
12.26
9.22
9.96%
9.80
N/A
10.80
12.54
9.69
N/A
N/A
9.60%
10.80
12.51
9.64
2013
N/A
N/A
9.82%
10.81
12.81
9.58
1 Amortization expense related to qualified affordable housing investment costs is recognized in Provision for income taxes for all periods presented as allowed by
an accounting standard adopted in 2014. Prior to 2014, these amounts were recognized in Other noninterest expense and have been reclassified for comparability
as presented. See Table 30 in the MD&A (Item 7) for additional information.
2 See Table 30 in the MD&A (Item 7) for a reconcilement of non-U.S. GAAP measures and additional information.
3 Basel III Final Rules became effective for the Company on January 1, 2015; thus, Basel III CET1 ratios are not applicable ("N/A") in periods ending prior to January
1, 2015 and Basel I Tier 1 common equity ratio is N/A in periods ending after January 1, 2015. Tier 1 capital, Total capital, and Leverage ratios for periods ended
prior to January 1, 2015 were calculated under Basel I. The CET1 ratio on a fully phased-in basis at December 31, 2017, 2016, and 2015 is estimated.
24
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Important Cautionary Statement About Forward-Looking Statements
This report contains forward-looking statements. Statements
regarding: (i) future levels of capital markets related income,
commercial real estate related income, interest income, net
interest margin, core personnel and other expenses, efficiency,
the net charge-off ratio, the provision for loan losses, net charge-
offs, capital returns, rates paid on deposits, investments in talent
and technology, our capital ratios, and share repurchases; (ii) the
future effects of the 2017 Tax Act and tax reform; (iii) the future
profitability of our Consumer segment; (iv) the asset sensitivity
of our balance sheet and our exposure to interest rate risk in future
periods; (v) the future growth in our Wholesale segment; (vi) the
future effective tax rate; (vii) future changes in the size and
composition of the securities AFS portfolio; (viii) the future
effect of the redemption of our Series E Preferred Stock on our
capital ratios; (ix) future impacts of ASUs not yet adopted; (x)
future impacts of liabilities arising from legal claims; and (xi)
future credit ratings and outlook, are forward-looking
statements. Also, any statement that does not describe historical
or current facts is a forward-looking statement. These statements
often include the words “believe,” “expect,” “anticipate,”
“estimate,” “intend,” “target,” “forecast,” “future,” “strategy,”
“goal,” “initiative,” “plan,” “opportunity,” “potentially,”
“probably,” “project,” “outlook,” or similar expressions or future
conditional verbs such as “may,” “will,” “should,” “would,” and
“could.” Such statements are based upon the current beliefs and
expectations of management and on information currently
available to management. They speak as of the date hereof, and
we do not assume any obligation to update the statements made
herein or to update the reasons why actual results could differ
from those contained in such statements in light of new
information or future events.
Forward-looking statements are subject to significant risks
and uncertainties. Investors are cautioned against placing undue
reliance on such statements. Actual results may differ materially
from those set forth in the forward-looking statements. Factors
that could cause actual results to differ materially from those
described in the forward-looking statements can be found in Part
I, Item 1A., "Risk Factors" in this Form 10-K and also include
risks discussed in this report and in other periodic reports that
we file with the SEC. Additional factors include: current and
future legislation and regulation could require us to change our
business practices, reduce revenue, impose additional costs, or
otherwise
or
competitiveness; we are subject to stringent capital adequacy and
liquidity requirements and our failure to meet these would
adversely affect our financial condition; the monetary and fiscal
policies of the federal government and its agencies could have
a material adverse effect on our earnings; our financial results
have been, and may continue to be, materially affected by general
economic conditions, and a deterioration of economic conditions
or of the financial markets may materially adversely affect our
lending and other businesses and our financial results and
condition; changes in market interest rates or capital markets
could adversely affect our revenue and expenses, the value of
assets and obligations, and the availability and cost of capital
operations
adversely
business
affect
and liquidity; interest rates on our outstanding financial
instruments might be subject to change based on regulatory
developments, which could adversely affect our revenue,
expenses, and the value of those financial instruments; our
earnings may be affected by volatility in mortgage production
and servicing revenues, and by changes in carrying values of our
servicing assets and mortgages held for sale due to changes in
interest rates; disruptions in our ability to access global capital
markets may adversely affect our capital resources and liquidity;
we are subject to credit risk; we may have more credit risk and
higher credit losses to the extent that our loans are concentrated
by loan type, industry segment, borrower type, or location of the
borrower or collateral; we rely on the mortgage secondary market
and GSEs for some of our liquidity; loss of customer deposits
could increase our funding costs; any reduction in our credit
rating could increase the cost of our funding from the capital
markets; we are subject to litigation, and our expenses related to
this litigation may adversely affect our results; we may incur
fines, penalties and other negative consequences from regulatory
violations, possibly even inadvertent or unintentional violations;
we are subject to certain risks related to originating and selling
mortgages, and may be required to repurchase mortgage loans
or indemnify mortgage loan purchasers as a result of breaches
of representations and warranties, or borrower fraud, and this
could harm our liquidity, results of operations, and financial
condition; we face risks as a servicer of loans; consumers and
small businesses may decide not to use banks to complete their
financial transactions, which could affect net income; we have
businesses other than banking which subject us to a variety of
risks; negative public opinion could damage our reputation and
adversely impact business and revenues; we may face more
intense scrutiny of our sales,
incentive
compensation practices; we rely on other companies to provide
key components of our business infrastructure; competition in
the financial services industry is intense and we could lose
business or suffer margin declines as a result; we continually
encounter technological change and must effectively develop
and implement new technology; maintaining or increasing
market share depends on market acceptance and regulatory
approval of new products and services; we have in the past and
may in the future pursue acquisitions, which could affect costs
and from which we may not be able to realize anticipated
benefits; we depend on the expertise of key personnel, and if
these individuals leave or change their roles without effective
replacements, operations may suffer; we may not be able to hire
or retain additional qualified personnel and recruiting and
compensation costs may increase as a result of turnover, both of
which may increase costs and reduce profitability and may
adversely impact our ability to implement our business
strategies; our framework for managing risks may not be
effective in mitigating risk and loss to us; our controls and
procedures may not prevent or detect all errors or acts of fraud;
we are at risk of increased losses from fraud; our operational and
communications systems and infrastructure may fail or may be
the subject of a breach or cyber-attack that, if successful, could
training, and
25
management services. We operate two business segments:
Consumer and Wholesale, with functional activities included in
Corporate Other. See Note 20, "Business Segment Reporting,"
to the Consolidated Financial Statements in this Form 10-K for
a description of our business segments and related business
segment structure realignment from three segments to two
segments in the second quarter of 2017.
This MD&A is intended to assist readers in their analysis of
the accompanying Consolidated Financial Statements and
supplemental financial information. It should be read in
conjunction with the Consolidated Financial Statements and
Notes to the Consolidated Financial Statements in Item 8 of this
Form 10-K, as well as other information contained in this
document. When we refer to “SunTrust,” “the Company,” “we,”
“our,” and “us” in this narrative, we mean SunTrust Banks, Inc.
and its consolidated subsidiaries.
In the MD&A, consistent with SEC guidance in Industry
Guide 3 that contemplates the calculation of tax exempt income
on a tax equivalent basis, we present net interest income, net
interest margin, total revenue, and efficiency ratios on an FTE
basis. The FTE basis adjusts for the tax-favored status of net
interest income from certain loans and investments using a
federal tax rate of 35% and state income taxes, where applicable,
to increase tax-exempt interest income to a taxable-equivalent
basis. We believe this measure to be the preferred industry
measurement of net interest income and that it enhances
comparability of net interest income arising from taxable and
tax-exempt sources. Additionally, we present other non-U.S.
in understanding
GAAP metrics
management’s view of particular financial measures, as well as
to align presentation of these financial measures with peers in
the industry who may also provide a similar presentation.
Reconcilements for all non-U.S. GAAP measures are provided
in Table 30.
to assist
investors
adversely affect our business and disrupt business continuity; a
disruption, breach, or failure in the operational systems and
infrastructure of our third party vendors and other service
providers, including as a result of cyber-attacks, could adversely
affect our business; natural disasters and other catastrophic
events could have a material adverse impact on our operations
or our financial condition and results; the soundness of other
financial institutions could adversely affect us; we depend on the
accuracy and completeness of information about clients and
counterparties; our accounting policies and processes are critical
to how we report our financial condition and results of operation,
and they require management to make estimates about matters
that are uncertain; depressed market values for our stock and
adverse economic conditions sustained over a period of time may
require us to write down all or some portion of our goodwill; our
stock price can be volatile; we might not pay dividends on our
stock; our ability to receive dividends from our subsidiaries or
other investments could affect our liquidity and ability to pay
dividends; and certain banking laws and certain provisions of
our articles of incorporation may have an anti-takeover effect.
INTRODUCTION
located
We are a leading provider of financial services, with our
in Atlanta, Georgia. Our principal
headquarters
subsidiary, SunTrust Bank, offers a full line of financial services
for consumers, businesses, corporations, institutions, and not-
for-profit entities, both through its branches (located primarily
in Florida, Georgia, Virginia, North Carolina, Tennessee,
Maryland, South Carolina, and the District of Columbia) and
through other national delivery channels. In addition to deposit,
credit, and trust and investment services offered by the Bank,
our other subsidiaries provide capital markets, mortgage
banking, securities brokerage, investment banking, and wealth
26
EXECUTIVE OVERVIEW
Financial Performance
We delivered another year of strong financial performance in
2017, marking the sixth consecutive year of higher EPS,
improved efficiency, and increased capital returns for our
shareholders. We enjoyed solid revenue growth across both of
our business segments, led by growth in net interest income as
well as a significant year-over-year increase in noninterest
income for our Wholesale segment. While we benefited from a
favorable operating environment in 2017, a key driver of our
performance was our improved executional abilities, as we are
meeting more client needs and demonstrating solid discipline on
expenses and returns. Diluted EPS for 2017 was $4.47, up 24%
relative to 2016. EPS included $0.39 per share in net benefits
associated with Form 8-K and tax reform-related items
recognized during the fourth quarter of 2017, summarized in
Table 1 below. These items included actions we announced in
our December 4, 2017 Form 8-K as well as the impact of the
2017 Tax Act, including actions we took as a result to better
position the Company for improved long-term success.
2017 Financial Highlights:
• EPS, efficiency, and capital returns for our shareholders improved for the sixth consecutive year
Total revenue and net interest income both improved for the third consecutive year
We generated record investment banking income for the 10th consecutive year—up 21% compared to 2016
We achieved our 2017 tangible efficiency goal of between 61% and 62%, as reflected in our adjusted tangible efficiency
ratio* of 61.0% for 2017
Our strong capital position enabled us to increase our capital returns (which includes dividends and repurchases of common
stock)—up 47% compared to 2016; we repurchased more than $1.3 billion of our outstanding common stock, resulting in
a 4% decline in common shares outstanding compared to the prior year, and we increased our quarterly common stock
dividend by 54%
• We maintained strong capital ratios that continue to be well above regulatory requirements, with our CET1 and estimated, fully
phased-in CET1* ratios at 9.74% and 9.59%, respectively, as of December 31, 2017
• Book value per share was $47.94, and tangible book value per share* was $34.82, both up 6% from the prior year
• Our LCR was above the regulatory requirement of 100%
• Average LHFI increased 2% and average consumer and commercial deposits increased 3%, compared to the prior year
• Our asset quality remained very strong, evidenced by our 0.25% net charge-off ratio, 0.47% NPL ratio, and 1.21% ALLL to period-
end LHFI ratio
* : See Table 30 in this MD&A for a reconcilement of non-U.S. GAAP measures and additional information
Form 8-K and Tax Reform-related Items Impacting 4th Quarter and Full Year 2017 Results
Table 1
(Dollars in millions)
Form 8-K items previously announced on December 4, 2017:
Gain on sale of Premium Assignment Corporation ("PAC") subsidiary
Net charge related to efficiency actions
Tax impact of above items (tax expense)
SunTrust Mortgage ("STM") state NOL valuation allowance adjustment (tax expense)
Net benefit of Form 8-K items (after-tax)
Tax reform-related items:
Charitable contribution to support financial well-being initiatives
Discretionary 401(k) contribution and other employee benefits
Securities available for sale ("securities AFS") portfolio restructuring losses
Loss arising from anticipated sale of servicing rights
Tax impact of above items (tax benefit)
Revaluation of net deferred tax liability and other discrete tax items (tax benefit)
Net benefit of tax reform-related items (after-tax)
Net benefit of Form 8-K and tax reform-related items (after-tax)
Impacted Line Item in the
Consolidated Statements of Income
Gain on sale of subsidiary
Other staff expense;
Other noninterest expense
Provision for income taxes
Provision for income taxes
Marketing and customer development
Employee compensation and benefits
Net securities (losses)/gains
Mortgage servicing related income
Provision for income taxes
Provision for income taxes
1
1
2
1
$107
(36)
(29)
(27)
$16
($50)
(25)
(109)
(5)
70
291
$172
$188
1 Amounts are calculated using a federal statutory rate of 35% and are adjusted for permanent items, if applicable.
2 Amount does not foot as presented due to rounding.
Total revenue for 2017 increased 4% compared to 2016 driven
largely by higher net interest income and strong investment
banking and commercial real estate related income. Net interest
income increased 8% relative to 2016 due to net interest margin
expansion and growth in average earning assets, partially offset
by an increase in average interest-bearing liabilities. Noninterest
income decreased 1% compared to 2016, driven primarily by
lower mortgage production related income, offset largely by
27
higher investment banking and commercial real estate related
income. Looking to the first quarter of 2018, we expect capital
markets-related income to rebound and commercial real estate
related income to decline from a seasonally strong fourth quarter
of 2017 level.
Our net interest margin increased 14 basis points compared
to 2016, driven primarily by higher earning asset yields arising
from higher benchmark interest rates, continued favorable mix
shift in earning assets, and lower premium amortization, offset
partially by higher funding costs. Looking to the first quarter of
2018, we expect net interest margin to increase up to two basis
points compared to the fourth quarter of 2017 as the benefit of
the December Fed Funds rate increase is mostly offset by the
change in our FTE calculation as a result of the 2017 Tax Act.
Beyond that, we anticipate that net interest margin trends will
depend on the interest rate environment; however, we do expect
some net interest margin expansion in 2018 if interest rates
continue to rise.
During the fourth quarter of 2017, we sold and subsequently
reinvested approximately $3 billion of securities AFS with a
similar mix and higher yields (primarily within U.S. Treasury
securities and agency residential MBS), which we expect will
increase annual interest income by approximately $20 million
beginning in 2018, all else being equal. See additional discussion
related to revenue, noninterest income, and net interest income
and margin in the "Noninterest Income" and "Net Interest
Income/Margin" sections of this MD&A. Also in this MD&A,
see Table 21, "Net Interest Income Asset Sensitivity," for an
analysis of potential changes in net interest income due to
instantaneous moves in benchmark interest rates.
Noninterest expense increased 5% compared to 2016. The
increase was driven largely by higher personnel expenses and
higher net occupancy expenses, offset partially by the favorable
resolution of several legal matters during the third quarter of
2017. Additionally, noninterest expense for 2017 was negatively
impacted by $111 million of net Form 8-K and tax reform-related
items recognized during the fourth quarter of 2017, comprised
of a $50 million charitable contribution to support financial well-
being initiatives, a $36 million net charge related to efficiency
actions, and $25 million of discretionary 401(k) contributions
and other employee benefits. Looking to the first quarter of 2018,
we expect core personnel expenses—excluding the fourth
quarter of 2017 tax reform-related personnel expenses of $25
million—to increase by approximately $75 million from the
fourth quarter of 2017 due to the typical seasonal increase in
401(k) and FICA expenses. Though our expense base has and
will vary from quarter to quarter, we remain focused on managing
our expenses to provide funding for investments in talent,
technology, and improved product offerings. See additional
discussion related to noninterest expense in the "Noninterest
Expense" section of this MD&A.
For 2017, our efficiency and tangible efficiency ratios were
63.1% and 62.3%, compared to the prior year ratios of 62.6%
and 62.0%, respectively. Our current year efficiency ratios were
negatively impacted by the Form 8-K and tax reform-related
items recognized during the fourth quarter of 2017; when
excluding the impact of these items, our adjusted tangible
efficiency ratio improved to 61.0% for 2017, compared to 62.0%
for 2016. Looking to 2018, there will be headwinds to efficiency
arising from tax reform, attributable to both FTE adjustments,
28
and the corresponding actions we have taken to invest in our
people. Despite this, we are confident in our ability to improve
efficiency in 2018, due to our heightened expense discipline, the
actions we took in the last two quarters of 2017, and a positive
economic and revenue outlook. See Table 30, "Selected
Financial Data and Reconcilement of Non-U.S. GAAP
Measures," in this MD&A for additional information regarding,
and reconciliations of, our tangible and adjusted tangible
efficiency ratios.
Overall asset quality remained very strong during 2017,
evidenced by our 0.25% net charge-off ratio and 0.47% NPL
ratio. These low levels reflect the relative strength across our
LHFI portfolio, though we recognize that there could be
variability moving forward and that credit losses will eventually
normalize. Overall, we expect to operate within a net charge-off
ratio of between 25 and 35 basis points in 2018. We also forecast
a provision for loan losses that generally approximates net
charge-offs. See additional discussion of our credit and asset
quality, in the “Loans,” “Allowance for Credit Losses,” and
“Nonperforming Assets” sections of this MD&A.
Average LHFI increased 2% compared to 2016, driven by
growth across most consumer loan portfolios and in commercial
construction loans. These increases were offset partially by
declines in average residential home equity products and CRE
loans. Our consumer lending initiatives continue to produce solid
loan growth through each of our major channels, while furthering
the positive mix shift within the LHFI portfolio and improving
our return profile. Looking ahead, we continue to have good
dialogue with our clients and we believe that tax reform should
be a catalyst for increased investment and growth. Further, we
are well positioned to meet our clients' needs, whether through
lending, capital markets, or other solutions. See additional loan
discussions in the “Loans,” “Nonperforming Assets,” and "Net
Interest Income/Margin" sections of this MD&A.
Average consumer and commercial deposits increased 3%
compared to 2016, driven by growth across both of our business
segments and across most of our product categories, particularly
NOW accounts and time deposits. Rates paid on our interest-
bearing consumer and commercial deposits increased 12 basis
points compared to 2016 in response to rising benchmark interest
rates. The strong deposit growth we have produced over the past
several years, in addition to our access to low-cost funding,
enables us to prudently manage our funding base and more
effectively manage our deposit costs. Looking forward to 2018,
we continue to be focused on maximizing the value proposition
of deposits for our clients, outside of the rate paid, by meeting
more of our clients' needs through strategic investments in talent
and technology. See additional discussion regarding average
deposits in the "Net Interest Income/Margin" and "Deposits"
sections of this MD&A.
regulatory capital
increased compared
Capital and Liquidity
Our
to
ratios
December 31, 2016, with a CET1 ratio of 9.74% at December 31,
2017, driven primarily by growth in retained earnings.
Additionally, our CET1 ratio, on a fully phased-in basis, was
estimated to be 9.59% at December 31, 2017, which is well above
the regulatory requirement. Our book value and tangible book
value per common share both increased 6% compared to
December 31, 2016, due primarily to earnings growth. See
additional details related to our capital in Note 13, "Capital," to
the Consolidated Financial Statements in this Form 10-K. Also
see Table 30, "Selected Financial Data and Reconcilement of
Non-U.S. GAAP Measures," in this MD&A for additional
information regarding, and reconciliations of, tangible book
value per common share and our fully phased-in CET1 ratio.
During the year, we increased our quarterly common stock
dividend by 54%, beginning in the third quarter of 2017, which
resulted in dividends for 2017 of $1.32 per common share, an
increase from $1.00 per common share in 2016. We also
repurchased $1.3 billion of our outstanding common stock
during the year, which included $480 million under our 2016
capital plan, an incremental $174 million pursuant to the 1% of
Tier 1 capital de minimis exception allowed under the applicable
2016 Capital Plan Rule, and $660 million in conjunction with
the 2017 capital plan. Additionally, as previously announced, we
intend to use proceeds from our November 2017 Series H
Preferred Stock issuance to redeem all outstanding Series E
Preferred Stock depositary shares on March 15, 2018. The
redemption of Series E Preferred Stock depositary shares is
expected to reduce our Tier 1 capital and Total capital ratios by
approximately 25 basis points, all else being equal. Given our
strong capital position combined with our improved earnings
trajectory, we should have capacity to increase capital returns to
our owners, the specifics of which will depend upon our rigorous
capital planning process. See additional details related to our
capital actions and share repurchases in the “Capital Resources”
section of this MD&A and in Part II, Item 5 of this Form 10-K.
Business Segments Highlights
Consumer
Consumer continues to deliver healthy overall business and
revenue momentum. Net interest income increased $233 million,
or 7%, compared to 2016, resulting from strong loan and deposit
growth and continued balance sheet optimization. The average
balance of our LHFI portfolio increased 5% compared to 2016.
Deposit growth continues to be a key contributor to our net
interest income momentum, with average balances up 3% year-
over-year. Noninterest income decreased 8% compared to the
same period in 2016, due primarily to lower mortgage-related
income, as a result of lower production volume due to decreased
refinancing activity. Noninterest expense was relatively stable
compared to prior year as a result of our continued expense
management efforts. Overall, we took significant actions in 2017
to improve the efficiency and effectiveness of the Consumer
segment, as evidenced by continued growth in digital channels
and a 7% year-over-year reduction in our branches. Additionally,
we have seen positive momentum in our wealth management
business as total managed assets increased 11% compared to
2016. Our solid loan and deposit growth, as well as our continued
investments in an improved client experience, are expected to
improve profitability in 2018.
Wholesale
Wholesale delivered record revenue and net income during 2017
due to favorable capital market conditions and continued success
in meeting client needs. Total revenue increased $589 million
compared to 2016 due primarily to increases in net interest
income, investment banking income, commercial real estate
related income, and a $107 million gain on the sale of PAC. Net
interest income was a key contributor to our strong revenue
growth, up 11% compared to 2016 as a result of higher loan
yields. Investment banking income continues to be a growth
driver for us as we continue to have strategic success with new
and existing Wholesale clients. Noninterest expense increased
12% compared to the prior year. The year-over-year increase was
driven by higher compensation due to improved business
performance, incremental costs relating to Pillar, and ongoing
investments in technology. During 2017, we also expanded
Commercial & Business Banking into new markets in Ohio and
Texas, which allowed us to further expand our differentiated
value proposition to new clients. Overall, while market
conditions can drive quarterly variability, our differentiated
business model and proven executional abilities in Wholesale
continue to deliver strong results and we expect to see further
growth in 2018.
Additional information related to our business segments can be
found in Note 20, "Business Segment Reporting," to the
Consolidated Financial Statements in this Form 10-K, and
further discussion of our business segment results for the year
ended December 31, 2017 and 2016 can be found in the
"Business Segment Results" section of this MD&A.
29
Consolidated Daily Average Balances, Income/Expense, and Average Yields Earned/Rates Paid
Table 2
(Dollars in millions)
ASSETS
LHFI: 1
C&I
CRE
Commercial construction
Residential mortgages - guaranteed
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Consumer student - guaranteed
Consumer other direct
Consumer indirect
Consumer credit cards
Nonaccrual 2
Total LHFI
Securities AFS:
Taxable
Tax-exempt
Total securities AFS
Fed funds sold and securities borrowed or purchased
under agreements to resell
LHFS
Interest-bearing deposits in other banks
Interest earning trading assets
Total earning assets
ALLL
Cash and due from banks
Other assets
Noninterest earning trading assets and derivative
instruments
Unrealized gains on securities available for sale, net
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts
Money market accounts
Savings
Consumer time
Other time
Total interest-bearing consumer and commercial
deposits
Brokered time deposits
Foreign deposits
Total interest-bearing deposits
Funds purchased
Securities sold under agreements to repurchase
Interest-bearing trading liabilities
Other short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Noninterest-bearing trading liabilities and derivative
instruments
Shareholders’ equity
Total liabilities and shareholders’ equity
Average
Balances
2017
Income/
Expense
Yields/
Rates
Average
Balances
2016
Income/
Expense
Yields/
Rates
Average
Balances
2015
Income/
Expense
Yields/
Rates
$2,286
177
148
16
1,003
470
15
286
406
401
145
32
5,385
761
13
774
9
99
—
120
6,387
$131
157
1
42
57
388
12
4
404
13
15
26
8
288
754
$68,423
5,158
4,011
539
26,392
10,969
346
6,464
8,239
11,492
1,429
754
144,216
30,688
433
31,121
1,215
2,483
25
5,152
184,212
(1,735)
5,123
16,376
903
52
$204,931
$45,009
53,592
6,519
5,626
5,148
115,894
941
421
117,256
1,217
1,558
968
1,591
11,065
133,655
43,655
2,936
384
24,301
$204,931
$2,148
169
94
20
964
484
17
224
313
365
120
21
4,939
645
6
651
1
92
—
95
5,778
$55
107
2
43
39
246
12
1
259
4
7
24
3
260
557
3.34% $68,406
3.43
5,808
3.70
2,898
2.92
575
3.80
25,554
4.28
12,297
4.26
377
4.42
5,551
4.93
6,871
3.49
10,712
10.12
1,188
4.28
881
3.73
141,118
2.48
2.99
2.49
0.69
4.00
1.20
2.33
3.47
28,216
189
28,405
1,241
2,570
24
5,467
178,825
(1,746)
4,999
14,880
1,388
658
$199,004
0.29% $40,949
0.29
53,795
0.02
6,285
0.75
5,852
1.10
3,908
0.34
110,789
1.29
0.86
0.34
1.02
0.92
2.70
0.50
2.60
0.56
926
123
111,838
1,055
1,734
1,025
1,452
10,767
127,871
43,400
3,252
413
24,068
$199,004
3.14% $65,786
6,178
2.92
1,603
3.25
636
3.45
23,759
3.77
13,535
3.94
384
4.39
4,584
4.03
5,344
4.56
10,262
3.40
944
10.10
543
2.43
133,558
3.50
2.29
3.37
2.29
0.10
3.60
0.40
1.73
3.23
26,327
176
26,503
1,147
2,348
22
5,235
168,813
(1,835)
5,614
14,527
1,265
508
$188,892
0.13% $35,161
50,518
0.20
6,165
0.03
6,443
0.73
3,813
1.00
102,100
0.22
1.33
0.42
0.23
0.37
0.42
2.29
0.23
2.42
0.44
888
218
103,206
822
1,821
881
2,135
10,873
119,738
42,102
3,276
430
23,346
$188,892
$1,974
173
50
24
913
501
19
173
230
333
94
22
4,506
587
6
593
—
82
—
84
5,265
$31
85
2
49
39
206
13
—
219
1
4
22
3
252
501
3.00%
2.80
3.12
3.77
3.84
3.70
4.85
3.78
4.30
3.24
10.00
4.13
3.37
2.23
3.70
2.24
—
3.47
0.12
1.62
3.12
0.09%
0.17
0.03
0.77
1.02
0.20
1.41
0.13
0.21
0.11
0.21
2.44
0.16
2.32
0.42
Interest rate spread
Net interest income 3
Net interest income-FTE 3, 4
Net interest margin 5
Net interest margin-FTE 4, 5
1 Interest income includes loan fees of $177 million, $165 million, and $189 million for the years ended December 31, 2017, 2016, and 2015, respectively.
2 Income on consumer nonaccrual loans, if recognized, is recognized on a cash basis.
3 Derivative instruments employed to manage our interest rate sensitivity increased Net interest income by $104 million, $261 million, and $300 million for the years ended December 31,
3.06%
3.14
$5,221
$5,359
$4,764
$4,906
$5,633
$5,778
2.92%
3.00
2.82%
2.91
2.91%
2.79%
2.70%
2017, 2016, and 2015, respectively.
4 See Table 30, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for additional information and reconciliations of non-U.S. GAAP performance
measures. Approximately 95% of the total FTE adjustment for the years ended December 31, 2017, 2016, and 2015 was attributed to C&I loans.
5 Net interest margin is calculated by dividing annualized Net interest income by average Total earning assets.
30
Analysis of Changes in Net Interest Income 1
Table 3
(Dollars in millions)
Increase/(Decrease) in Interest Income:
LHFI:
C&I
CRE
Commercial construction
Residential mortgages - guaranteed
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Consumer student - guaranteed
Consumer other direct
Consumer indirect
Consumer credit cards
Nonaccrual
Securities AFS:
Taxable
Tax-exempt
Fed funds sold and securities borrowed or purchased
under agreements to resell
LHFS
Interest earning trading assets
Total increase in interest income
Increase/(Decrease) in Interest Expense:
NOW accounts
Money market accounts
Savings
Consumer time
Other time
Brokered time deposits
Foreign deposits
Funds purchased
Securities sold under agreements to repurchase
Interest-bearing trading liabilities
Other short-term borrowings
Long-term debt
Total increase in interest expense
Increase in Net Interest Income
Increase in Net Interest Income-FTE 2
2017 Compared to 2016
Rate
Net
Volume
2016 Compared to 2015
Rate
Net
Volume
$—
(20)
40
(1)
32
(54)
(2)
39
66
27
24
(3)
60
7
—
(3)
(6)
206
5
—
—
(2)
13
—
2
1
—
(2)
1
8
26
$138
28
14
(3)
7
40
—
23
27
9
1
14
56
—
8
10
31
403
71
50
(1)
1
5
—
1
8
8
4
4
20
171
$180
$232
$138
8
54
(4)
39
(14)
(2)
62
93
36
25
11
116
7
8
7
25
609
76
50
(1)
(1)
18
—
3
9
8
2
5
28
197
$412
$419
$80
(11)
42
(2)
68
(48)
—
39
69
15
25
10
42
1
—
7
4
341
7
6
—
(4)
1
—
—
—
—
3
(1)
(2)
10
$94
7
2
(2)
(17)
31
(2)
12
14
17
1
(11)
16
(1)
1
3
7
172
17
16
—
(2)
(1)
(1)
1
3
3
(1)
1
10
46
$331
$126
$174
(4)
44
(4)
51
(17)
(2)
51
83
32
26
(1)
58
—
1
10
11
513
24
22
—
(6)
—
(1)
1
3
3
2
—
8
56
$457
$453
1 Changes in Net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for Earning assets
and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate, while rate change is change
in rate times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume change and rate change at the
ratio each component bears to the absolute value of their total.
2 See Table 30, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for additional information and reconciliations of Net
interest income-FTE.
31
NET INTEREST INCOME/MARGIN (FTE)
Net interest income was $5.8 billion in 2017, an increase of $419
million, or 8%, compared to 2016. Net interest margin for 2017
increased 14 basis points, to 3.14%, compared to 2016. The
increase was driven by a 24 basis point increase in average
earning asset yields. Specifically, average LHFI yields increased
23 basis points, driven by notable increases in yield on average
commercial loans, residential home equity products, guaranteed
student loans, and consumer direct loans. In addition, yields on
securities AFS increased 20 basis points due to shifts in the
portfolio mix, lower premium amortization, and higher
benchmark interest rates. These increases were offset partially
by higher rates paid on average interest-bearing liabilities.
Rates paid on average interest-bearing liabilities increased
12 basis points compared to 2016, driven primarily by increases
in rates paid on NOW, money market accounts, and time deposits
as well as short-term borrowings and long-term debt. Compared
to 2016, the average rate paid on interest-bearing deposits
increased 11 basis points.
Average earning assets increased $5.4 billion, or 3%,
compared to 2016, driven primarily by a $3.1 billion, or 2%,
increase in average LHFI and a $2.7 billion, or 10%, increase in
average securities AFS. The increase in average LHFI was driven
by growth across most consumer loan portfolios, as well as
growth in commercial construction. The growth was offset, in
part, by declines in residential home equity products and CRE
loans as paydowns exceeded new originations and draws. See
the "Loans" section in this MD&A for additional discussion
regarding loan activity.
Average interest-bearing liabilities increased $5.8 billion,
or 5%, compared to 2016, due primarily to growth in consumer
and commercial deposits as well as an increase in foreign
deposits and long-term debt. Average interest-bearing consumer
and commercial deposits increased $5.1 billion, or 5%, compared
to 2016, due primarily to growth in NOW and other time account
balances resulting from continued success in deepening and
growing client relationships. Average long-term debt increased
$298 million, or 3%, compared to 2016, due primarily to our
senior note issuances under the Global Bank Note program,
offset by decreases in long-term FHLB advances and other
maturities. See the "Borrowings" section of this MD&A as well
as Note 11, "Borrowings and Contractual Commitments," to the
Consolidated Financial Statements in this Form 10-K for
additional information regarding our long-term debt.
We utilize interest rate swaps to manage interest rate risk.
These instruments are primarily receive-fixed, pay-variable
swaps that synthetically convert a portion of our commercial loan
portfolio from floating rates, based on LIBOR, to fixed rates. At
December 31, 2017, the outstanding notional balance of active
swaps that qualified as cash flow hedges on variable rate
commercial loans was $12.1 billion, compared to $16.7 billion
at December 31, 2016.
In addition to the income recognized from active swaps, we
recognize interest income from terminated swaps that were
previously designated as cash flow hedges on variable rate
commercial loans. Interest income from our commercial loan
swaps was $89 million in 2017, compared to $244 million in
2016 due primarily to a decrease in the notional balance of
qualifying swaps and an increase in LIBOR. As we manage our
interest rate risk we may continue to purchase additional and/or
terminate existing interest rate swaps.
Remaining swaps on commercial loans have maturities
through 2022 and have an average maturity of 3.6 years at
December 31, 2017. The weighted average rate on the receive-
fixed rate leg of the commercial loan swap portfolio was 1.40%,
and the weighted average rate on the pay-variable leg was 1.56%,
at December 31, 2017.
Looking to the first quarter of 2018, we expect net interest
margin to increase up to two basis points compared to the fourth
quarter of 2017 as the benefit of the December Fed Funds rate
increase is mostly offset by the change in our FTE calculation
as a result of the 2017 Tax Act. Beyond that, we anticipate that
net interest margin trends will depend on the interest rate
environment; however, we do expect some net interest margin
expansion in 2018 if interest rates continue to rise. Additionally,
during the fourth quarter of 2017, we sold and subsequently
reinvested approximately $3 billion of securities AFS with a
similar mix and higher yields (primarily within U.S. Treasury
securities and agency residential MBS), which we expect will
increase annual interest income by approximately $20 million
beginning in 2018, all else being equal.
Foregone Interest
Foregone interest income from NPLs reduced net interest margin
by less than one basis point for the year ended December 31,
2017. Forgone interest income from NPLs reduced net interest
margin by one basis point for the year ended December 31, 2016.
See additional discussion of our expectations of future credit
quality in the “Loans,” “Allowance for Credit Losses,” and
“Nonperforming Assets” sections of this MD&A. In addition,
Table 2 and Table 3 in this MD&A contain more detailed
information regarding average balances, yields earned, rates
paid, and associated impacts on net interest income.
32
NONINTEREST INCOME
(Dollars in millions)
Service charges on deposit accounts
Other charges and fees
Card fees
Investment banking income
Trading income
Trust and investment management income
Retail investment services
Mortgage production related income
Mortgage servicing related income
Gain on sale of subsidiary
Commercial real estate related income 1
Net securities (losses)/gains
Other noninterest income 1
Total noninterest income
Table 4
Year Ended December 31
2017
2016
2015
$603
385
344
599
189
309
278
231
191
107
123
(108)
103
$3,354
$630
380
327
494
211
304
281
366
189
—
69
4
128
$3,383
$622
377
329
461
181
334
300
270
169
—
56
21
148
$3,268
1 Beginning January 1, 2017, we began presenting income related to our Pillar, STCC, and Structured Real Estate businesses as a separate line item on the Consolidated
Statements of Income titled Commercial real estate related income. For periods prior to January 1, 2017, these amounts were previously presented in Other noninterest
income and have been reclassified to Commercial real estate related income for comparability.
Noninterest income decreased $29 million, or 1%, compared to
2016, driven primarily by lower mortgage production related
income, offset largely by higher investment banking and
commercial real estate related income. Noninterest income for
2017 was negatively impacted by $7 million of net Form 8-K
and tax reform-related items recognized during the fourth
quarter, comprised of $109 million of securities AFS portfolio
restructuring losses, a $107 million gain on sale of PAC, and a
$5 million loss arising from the anticipated sale of servicing
rights.
Client transaction-related-fees, which include service
charges on deposit accounts, other charges and fees, and card
fees, decreased $5 million compared to 2016. This decrease was
driven primarily by our enhanced posting order process that was
instituted during the fourth quarter of 2016, offset partially by
an increase in client transaction-related activity.
Investment banking income increased $105 million, or 21%,
compared to 2016. This increase was due to strong deal flow
activity across most product categories, particularly equity
offerings, mergers and acquisitions advisory, and syndicated
finance.
Trading income decreased $22 million, or 10%, compared
to 2016. This decrease was driven primarily by lower core trading
revenue during 2017.
Trust and investment management income increased $5
million, or 2%, compared to 2016. This increase was driven by
an increase in trust and institutional assets under management
as well as an increase in trust termination fees.
Mortgage production related income decreased $135
million, or 37%, compared to 2016. This decrease was driven by
lower gain on sale margins, lower production volume due to
decreased refinancing activity, and a lower repurchase reserve
release during 2017. Mortgage application volume decreased
24% and closed loan volume decreased 17% compared to 2016.
Mortgage servicing related income increased $2 million, or
1%, compared to 2016, driven primarily by higher servicing fees,
offset partially by lower net hedge performance and higher
servicing asset decay. Mortgage servicing related income for
2017 was also negatively impacted by a $5 million tax reform-
related loss arising from the anticipated sale of servicing rights.
The UPB of mortgage loans in the servicing portfolio was $165.5
billion at December 31, 2017, compared to $160.2 billion at
December 31, 2016.
Gain on sale of subsidiaries totaled $107 million for 2017,
resulting from our gain from the sale of PAC during the fourth
quarter of 2017, which was announced in our December 4, 2017
Form 8-K filed with SEC. For additional information regarding
the sale of PAC, see Note 2, "Acquisitions/Dispositions," to the
Consolidated Financial Statements in this Form 10-K.
Commercial real estate related income increased $54
million, or 78%, compared to 2016. This increase was due to
income generated from Pillar, which we acquired in December
2016, as well as higher structured real estate revenue. Looking
to the first quarter of 2018, we expect commercial real estate
related income to decline from a seasonally strong fourth quarter.
Net securities losses totaled $108 million compared to net
securities gains of $4 million in 2016. Net securities losses for
2017 were driven by the aforementioned securities restructuring
losses. Excluding the impact of the restructuring losses, net
securities gains decreased slightly compared to 2016.
Other noninterest income decreased $25 million, or 20%,
compared to 2016. This decrease was driven primarily by $44
million of net asset-related gains recognized in 2016, offset
partially by $17 million of net gains recognized on the sale of
leases and commercial LHFS in 2017.
33
NONINTEREST EXPENSE
(Dollars in millions)
Employee compensation
Employee benefits
Total personnel expenses
Outside processing and software
Net occupancy expense
Marketing and customer development
Regulatory assessments
Equipment expense
Other staff expense
Amortization
Consulting and legal fees
Operating losses
Other noninterest expense
Total noninterest expense
Table 5
Year Ended December 31
2017
2016
2015
$2,854
403
3,257
826
377
232
187
164
121
75
71
40
414
$5,764
$2,698
373
3,071
834
349
172
173
170
67
49
93
108
382
$5,468
$2,576
366
2,942
815
341
151
139
164
65
40
73
56
374
$5,160
Noninterest expense increased $296 million, or 5%, compared
to 2016, driven largely by higher personnel expenses and higher
net occupancy expenses, offset partially by the favorable
resolution of several legal matters during the third quarter of
2017. Additionally, noninterest expense for 2017 was negatively
impacted by $111 million of net Form 8-K and tax reform-related
items recognized during the fourth quarter of 2017, comprised
of a $50 million charitable contribution to support financial well-
being initiatives, a $36 million net charge related to efficiency
actions, and $25 million of discretionary 401(k) contributions
and other employee benefits.
Personnel expenses increased $186 million, or 6%,
compared to 2016. This increase was due primarily to higher
employee compensation costs associated with improved revenue
growth and the incremental compensation costs associated with
Pillar, which we acquired in December 2016. Personnel expenses
for 2017 were also negatively impacted by $25 million of tax
reform-related discretionary 401(k) contributions and other
employee benefits recognized during the fourth quarter of 2017.
When excluding these tax reform-related personnel expenses,
we expect personnel expenses for the first quarter of 2018 to
increase by approximately $75 million compared to the fourth
quarter of 2017 due to the typical seasonal increase in 401(k)
and FICA expenses.
Outside processing and software expense decreased $8
million, or 1%, compared to 2016. This decrease was due
primarily to lower transaction volume, efficiencies generated
with third party providers, and insourcing of certain activities,
offset partially by higher software-related investments.
Net occupancy expense increased $28 million, or 8%,
compared to 2016. This increase was due primarily to a reduction
in amortized gains from prior sale leaseback transactions.
Marketing and customer development expense increased
$60 million, or 35%, compared to 2016. This increase was due
primarily to a $50 million tax reform-related charitable
contribution during the fourth quarter of 2017 to support
financial well-being initiatives. Excluding the impact of this tax
reform-related item, marketing and customer development
expense increased slightly compared to 2016 driven by increased
sponsorship costs.
Regulatory assessments expense increased $14 million, or
8%, compared to 2016. This increase was driven by the FDIC
surcharge on large banks that became effective in the third quarter
of 2016, and a larger assessment base attributable to balance
sheet growth.
Other staff expense increased $54 million, or 81%,
compared to 2016. This increase was due to higher severance
costs recognized during the second half of 2017, largely in
connection with the voluntary early retirement program
announced in our December 4, 2017 Form 8-K (as part of our
net charge related to efficiency actions).
Amortization expense increased $26 million, or 53%,
compared to 2016. This increase was driven by an increase in
our community development investments, which are amortized
over the life of the related tax credits that these investments
generate. See the "Community Development Investments"
section of Note 10, "Certain Transfers of Financial Assets and
Variable Interest Entities," to the Consolidated Financial
Statements in this Form 10-K for additional information
regarding these investments.
Consulting and legal fees decreased $22 million, or 24%,
compared to 2016. This decrease was due to lower utilization of
consulting services and lower legal fees resulting from the
resolution of legal matters.
Operating losses decreased $68 million, or 63%, compared
to 2016. This decrease was driven by the favorable resolution of
several legal matters, which aggregated to $58 million during
the third quarter of 2017.
Other noninterest expense increased $32 million, or 8%,
compared to 2016. This increase was due primarily to software-
related writedowns associated with ongoing efficiency
initiatives, as well as branch and corporate real estate closure
costs.
34
PROVISION FOR INCOME TAXES
LOANS
The provision for income taxes includes federal and state income
taxes and interest. For the year ended December 31, 2017, the
provision for income taxes was $532 million, representing an
effective tax rate of 19%. For the year ended December 31, 2016,
the provision for income taxes was $805 million, representing
an effective tax rate of 30%. The decrease in the effective tax
rate was due primarily to the recognition of a $303 million
income tax benefit for the estimated impact of the remeasurement
of our DTAs and DTLs and other tax reform-related items due
to the enactment of the 2017 Tax Act.
The 2017 Tax Act makes broad changes to the U.S. tax code,
including reducing the U.S. federal corporate tax rate from 35%
to 21% effective January 1, 2018, eliminating the deduction for
FDIC premiums, limiting the deductibility of certain executive
compensation, and imposing new limitations on NOLs generated
after December 31, 2017.
We recorded an income tax benefit for the remeasurement
of our estimated DTAs and DTLs of $333 million to reflect the
newly enacted federal corporate income tax rate of 21%, which
is the rate at which the deferred tax balances are expected to
reverse in the future. However, as additional information
becomes available and additional analysis is completed, our
estimate of the DTAs and DTLs may change, which could impact
the remeasurement of these deferred tax balances. Any
adjustment to the remeasurement amount would be recorded as
an adjustment to the provision for income taxes in 2018 in the
period the amounts are determined.
Due to the enactment of the provisions of the 2017 Tax Act,
we expect that our 2018 effective tax rate will be approximately
20%. See Note 14, “Income Taxes,” to the Consolidated
Financial Statements in this Form 10-K for further information
related to the provision for income taxes.
Our disclosures about the credit quality of our loan portfolio and
the related credit reserves (i) describe the nature of credit risk
inherent in the loan portfolio, (ii) provide information on how
we analyze and assess credit risk in arriving at an adequate and
appropriate ALLL, and (iii) explain changes in the ALLL as well
as reasons for those changes.
Our loan portfolio consists of two loan segments:
Commercial loans and Consumer loans. Loans are assigned to
these segments based on the type of borrower, purpose, and/or
our underlying credit management processes. Additionally, we
further disaggregate each loan segment into loan types based on
common characteristics within each loan segment.
Commercial Loans
C&I loans include loans to fund business operations or activities,
loans secured by owner-occupied properties, corporate credit
cards, and other wholesale lending activities. Commercial loans
secured by owner-occupied properties are classified as C&I loans
because the primary source of loan repayment for these
properties is business income and not real estate operations. CRE
and Commercial construction loans include investor loans where
repayment is largely dependent upon the operation, refinance,
or sale of the underlying real estate.
Consumer Loans
Residential mortgages, both guaranteed (by a federal agency or
GSE) and nonguaranteed, consist of loans secured by 1-4 family
homes; mostly prime, first-lien loans. Residential home equity
products consist of equity lines of credit and closed-end equity
loans secured by residential real estate that may be in either a
first lien or junior lien position. Residential construction loans
include
real estate secured owner-occupied
construction-to-perm loans and lot loans.
residential
Consumer loans also include Guaranteed student loans,
Indirect loans (consisting of loans secured by automobiles, boats,
and recreational vehicles), Other direct loans (consisting
primarily of unsecured loans, direct auto loans, loans secured by
negotiable collateral, and private student loans), and Credit
cards.
35
The composition of our loan portfolio at December 31 is presented in Table 6:
Loan Portfolio by Types of Loans
(Dollars in millions)
Commercial loans:
C&I 1
CRE
Commercial construction
Total commercial loans
Consumer loans:
Residential mortgages - guaranteed
Residential mortgages - nonguaranteed 2
Residential home equity products
Residential construction
Guaranteed student
Other direct
Indirect
Credit cards
Total consumer loans
LHFI
LHFS 3
2017
2016
2015
2014
Table 6
2013
$66,356
$69,213
$67,062
$65,440
$57,974
5,317
3,804
75,477
560
27,136
10,626
298
6,633
8,729
12,140
1,582
67,704
4,996
4,015
78,224
537
26,137
11,912
404
6,167
7,771
10,736
1,410
65,074
6,236
1,954
75,252
629
24,744
13,171
384
4,922
6,127
10,127
1,086
61,190
6,741
1,211
73,392
632
23,443
14,264
436
4,827
4,573
10,644
901
59,720
5,481
855
64,310
3,416
24,412
14,809
553
5,545
2,829
11,272
731
63,567
$143,181
$143,298
$136,442
$133,112
$127,877
$2,290
$4,169
$1,838
$3,232
$1,699
1 Includes $3.7 billion, $3.7 billion, $3.9 billion, $4.6 billion, and $4.9 billion of lease financing and $778 million, $729 million, $672 million, $687 million, and
$705 million of installment loans at December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
2 Includes $196 million, $222 million, $257 million, $272 million, and $302 million of LHFI measured at fair value at December 31, 2017, 2016, 2015, 2014, and
2013, respectively.
3 Includes $1.6 billion, $3.5 billion, $1.5 billion, $1.9 billion, and $1.4 billion of LHFS measured at fair value at December 31, 2017, 2016, 2015, 2014, and 2013,
respectively.
Table 7 presents maturities and sensitivities of certain LHFI to changes in interest rates:
(Dollars in millions)
Loan Maturity
C&I and CRE 1
Commercial construction
Total
Interest Rate Sensitivity
Selected loans with:
Predetermined interest rates
Floating or adjustable interest rates
Total
At December 31, 2017
Total
Due in 1 Year or
Less
Due After 1 Year
through 5 Years
Due After 5 Years
Table 7
$67,155
3,804
$70,959
$15,713
155
$15,868
$42,182
3,169
$45,351
$3,743
41,608
$45,351
$9,260
480
$9,740
$3,443
6,297
$9,740
1 Excludes $3.7 billion of lease financing and $778 million of installment loans.
36
Table 8 presents our outstanding commercial LHFI by industry:
(Dollars in millions)
Real estate
Consumer products and services
Health care & pharmaceuticals
Automotive
Diversified financials and insurance
Diversified commercial services and supplies
Government
Retail
Capital goods
Media & telecommunication services
Technology (hardware & software)
Energy
Materials
Utilities
Not-for-profits/religious organizations
Transportation
Other
Total commercial LHFI
December 31, 2017
December 31, 2016
Commercial
LHFI
% of Total
Commercial
Commercial
LHFI
% of Total
Commercial
Table 8
$12,905
9,303
8,058
7,444
7,227
3,837
3,438
3,383
3,075
2,979
2,371
2,176
2,044
2,030
1,914
1,795
1,498
$75,477
17%
12
11
10
10
5
5
4
4
4
3
3
3
3
3
2
2
100%
$13,028
9,450
7,437
7,012
8,627
4,149
3,775
3,588
3,226
2,593
3,259
2,584
2,083
2,119
1,768
2,103
1,423
$78,224
17%
12
10
9
11
5
5
5
4
3
4
3
3
3
2
3
2
100%
Table 9 presents our LHFI portfolio by geography (based on the U.S. Census Bureau's classifications of U.S. regions):
(Dollars in millions)
South region:
Florida
Georgia
Virginia
Maryland
North Carolina
Texas
Tennessee
South Carolina
District of Columbia
Other Southern states
Total South region
Northeast region:
New York
Pennsylvania
New Jersey
Other Northeastern states
Total Northeast region
West region:
California
Other Western states
Total West region
Midwest region:
Illinois
Ohio
Missouri
Other Midwestern states
Total Midwest region
Foreign loans
Total
Commercial LHFI
December 31, 2017
Consumer LHFI
Table 9
Total LHFI
Balance
% of Total
Commercial
Balance
% of Total
Consumer
Balance
% of Total
LHFI
$12,792
10,250
6,580
4,104
4,482
3,954
4,101
1,155
1,501
2,791
51,710
4,731
1,458
1,327
2,387
9,903
4,893
2,172
7,065
1,637
718
922
2,211
5,488
1,311
$75,477
17%
14
9
5
6
5
5
2
2
4
69
6
2
2
3
13
6
3
9
2
1
1
3
7
2
100%
37
$13,474
8,462
7,545
6,095
5,354
4,122
2,985
2,385
1,022
2,452
53,896
1,139
1,189
689
895
3,912
3,246
2,235
5,481
922
688
395
2,336
4,341
74
$67,704
20%
12
11
9
8
6
4
4
2
4
80
2
2
1
1
6
5
3
8
1
1
1
3
6
—
100%
$26,266
18,712
14,125
10,199
9,836
8,076
7,086
3,540
2,523
5,243
105,606
5,870
2,647
2,016
3,282
13,815
8,139
4,407
12,546
2,559
1,406
1,317
4,547
9,829
1,385
$143,181
18%
13
10
7
7
6
5
2
2
4
74
4
2
1
2
10
6
3
9
2
1
1
3
7
1
100%
(Dollars in millions)
South region:
Florida
Georgia
Virginia
Maryland
North Carolina
Tennessee
Texas
South Carolina
District of Columbia
Other Southern states
Total South region
Northeast region:
New York
Pennsylvania
New Jersey
Other Northeastern states
Total Northeast region
West region:
California
Other Western states
Total West region
Midwest region:
Illinois
Ohio
Missouri
Other Midwestern states
Total Midwest region
Foreign loans
Total
Commercial LHFI
December 31, 2016
Consumer LHFI
Total LHFI
Balance
% of Total
Commercial
Balance
% of Total
Consumer
Balance
% of Total
LHFI
$13,143
9,991
6,727
4,100
4,211
4,631
3,794
1,707
1,330
3,884
53,518
4,906
1,534
1,353
2,856
10,649
4,137
2,384
6,521
1,614
638
816
2,341
5,409
2,127
$78,224
17%
13
9
5
5
6
5
2
2
5
68
6
2
2
4
14
5
3
8
2
1
1
3
7
3
100%
$13,487
8,124
7,538
5,913
5,154
2,992
3,480
2,322
976
2,130
52,116
1,044
1,089
637
841
3,611
3,338
2,077
5,415
772
622
359
2,110
3,863
69
$65,074
21%
12
12
9
8
5
5
4
1
3
80
2
2
1
1
6
5
3
8
1
1
1
3
6
—
100%
$26,630
18,115
14,265
10,013
9,365
7,623
7,274
4,029
2,306
6,014
105,634
5,950
2,623
1,990
3,697
14,260
7,475
4,461
11,936
2,386
1,260
1,175
4,451
9,272
2,196
$143,298
19%
13
10
7
7
5
5
3
2
4
74
4
2
1
3
10
5
3
8
2
1
1
3
6
2
100%
Loans Held for Investment
LHFI totaled $143.2 billion at December 31, 2017, a decrease
of $117 million from December 31, 2016, driven by decreases
in C&I loans and residential home equity products, offset largely
by growth across most consumer loan types.
Average LHFI during 2017 totaled $144.2 billion, up $3.1
billion compared to 2016, driven by growth across most
consumer loan types and in commercial construction loans.
These increases were offset partially by declines in average
residential home equity products and CRE loans. See the "Net
Interest Income/Margin" section of this MD&A for more
information regarding average loan balances.
Commercial loans decreased $2.7 billion, or 4%, during
2017, due to a $2.9 billion, or 4%, decline in C&I loans driven
by elevated paydowns and lower revolver utilization. The
decrease in C&I loans was offset partially by a $321 million, or
6%, increase in CRE loans due to organic loan production and
draws on existing commitments.
Consumer loans increased $2.6 billion, or 4%, during 2017,
driven by growth in indirect loans of $1.4 billion, or 13%,
nonguaranteed residential mortgages of $999 million, or 4%,
other direct loans of $958 million, or 12%, and guaranteed
student loans of $466 million, or 8%. These increases were offset
partially by a $1.3 billion, or 11%, decrease in residential home
equity products as payoffs and paydowns exceeded new
originations and draws during 2017.
38
At December 31, 2017, 41% of our residential home equity
products were in a first lien position and 59% were in a junior
lien position. For residential home equity products in a junior
lien position, we own or service 32% of the loans that are senior
to the home equity product. Approximately 10% of the home
equity line portfolio is due to convert to amortizing term loans
by the end of 2018 and an additional 13% enter the conversion
phase over the following three years.
We perform credit management activities to limit our loss
exposure on home equity accounts. These activities may result
in the suspension of available credit and curtailment of available
draws of most home equity junior lien accounts when the first
lien position is delinquent, including when the junior lien is still
current. We monitor the delinquency status of first mortgages
serviced by other parties and actively monitor refreshed credit
bureau scores of borrowers with junior liens, as these scores are
highly sensitive to first lien mortgage delinquency. The average
borrower FICO score related to loans in our home equity
portfolio was approximately 770 and 765, and the average
outstanding loan size was approximately $44,000 and $46,000
at December 31, 2017 and 2016, respectively. The loss severity
on home equity junior lien accounts that incurred charge-offs
was approximately 76% and 80% at December 31, 2017 and
2016, respectively.
Loans Held for Sale
LHFS decreased $1.9 billion, or 45%, during 2017, driven by
lower mortgage production relative to 2016.
Asset Quality
Our asset quality metrics were strong during 2017, driven by
economic growth, improved residential housing markets, and
significant progress in working through remaining problem
energy-related exposures, evidenced by our modest net charge-
off and NPL ratios. These levels reflect the relative strength of
our LHFI portfolio in response to proactive steps we have taken
over the past several years to de-risk, diversify, and improve the
quality of our loan portfolio. Our financial results for the second
half of 2017 were impacted by hurricanes, which caused
increases in the ALLL to period-end LHFI ratio and the consumer
provision for loan losses compared to 2016. See the “Allowance
for Credit Losses” section of this MD&A for additional
information regarding our ALLL and provision for credit losses.
NPAs decreased $178 million, or 19%, during 2017, driven
primarily by the continued resolution of problem energy-related
exposures. At December 31, 2017, the ratio of NPLs to period-
end LHFI was 0.47%, a decrease of 12 basis points compared to
December 31, 2016.
For 2017 and 2016, net charge-offs totaled $367 million and
$483 million, and the net charge-off ratio was 0.25% and 0.34%,
respectively. The decrease in net charge-offs was driven
primarily by overall asset quality improvements and lower net
charge-offs associated with energy-related exposures, offset
partially by higher net charge-offs associated with consumer
loans.
Early stage delinquencies were 0.80% and 0.72% of total
loans at December 31, 2017 and December 31, 2016,
respectively. Early stage delinquencies, excluding government-
guaranteed loans, were 0.32% and 0.27% at December 31, 2017
and December 31, 2016, respectively. The increases in early
stage delinquencies described above resulted primarily from
impacts associated with hurricanes.
Overall, we expect to operate within a net charge-off ratio
of between 25 and 35 basis points in 2018. We also forecast a
provision for loan losses that generally approximates net charge-
offs.
39
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses consists of the ALLL and the
reserve for unfunded commitments. A rollforward of our
allowance for credit losses and summarized credit loss
experience is shown in Table 10. See Note 1, "Significant
Accounting Policies," and Note 7, "Allowance for Credit
Losses," to the Consolidated Financial Statements in this Form
10-K, as well as the "Critical Accounting Policies" section of
this MD&A for further information regarding our ALLL
accounting policy, determination, and allocation.
Summary of Credit Losses Experience
Table 10
(Dollars in millions)
Allowance for Credit Losses
Balance - beginning of period
Provision for unfunded commitments
Provision for loan losses:
Commercial loans
Consumer loans
Total provision for loan losses
Charge-offs:
Commercial loans
Consumer loans
Total charge-offs
Recoveries:
Commercial loans
Consumer loans
Total recoveries
Net charge-offs
Other 1
Balance - end of period
Components:
ALLL
Unfunded commitments reserve 2
Allowance for credit losses
Average LHFI
Period-end LHFI outstanding
Ratios:
ALLL to period-end LHFI 3
ALLL to NPLs 4
Net charge-offs to total average LHFI
Year Ended December 31
2017
2016
2015
2014
2013
$1,776
12
$1,815
4
$1,991
9
$2,094
4
$2,219
5
108
289
397
(167)
(324)
(491)
40
84
124
(367)
(4)
$1,814
$1,735
79
$1,814
$144,216
143,181
329
111
440
(287)
(304)
(591)
35
73
108
(483)
—
$1,776
$1,709
67
$1,776
133
23
156
(117)
(353)
(470)
45
84
129
(341)
—
$1,815
$1,752
63
$1,815
111
227
338
(128)
(479)
(607)
57
105
162
(445)
—
$1,991
$1,937
54
$1,991
197
351
548
(219)
(650)
(869)
66
125
191
(678)
—
$2,094
$2,044
50
$2,094
$141,118
143,298
$133,558
136,442
$130,874
133,112
$122,657
127,877
1.21%
2.59x
0.25%
1.19%
2.03x
0.34%
1.29%
2.62x
0.26%
1.46%
3.07x
0.34%
1.60%
2.12x
0.55%
1 Related to loans disposed in connection with the sale of PAC. For additional information regarding the sale of PAC, see Note 2, "Acquisitions/Dispositions," to the
Consolidated Financial Statements in this Form 10-K.
2 The unfunded commitments reserve is recorded in Other liabilities in the Consolidated Balance Sheets.
3 $196 million, $222 million, $257 million, $272 million, and $302 million of LHFI measured at fair value at December 31, 2017, 2016, 2015, 2014, and 2013,
respectively, were excluded from period-end LHFI in the calculation, as no allowance is recorded for loans measured at fair value. We believe that this presentation
more appropriately reflects the relationship between the ALLL and loans that attract an allowance.
4 $4 million, $3 million, $3 million, $3 million, and $7 million of NPLs measured at fair value at December 31, 2017, 2016, 2015, 2014, and 2013, respectively, were
excluded from NPLs in the calculation, as no allowance is recorded for NPLs measured at fair value. We believe that this presentation more appropriately reflects
the relationship between the ALLL and NPLs that attract an allowance.
40
Provision for Credit Losses
The total provision for credit losses includes the provision/
(benefit) for loan losses and the provision/(benefit) for unfunded
commitments. The provision for loan losses is the result of a
detailed analysis performed to estimate an appropriate and
adequate ALLL. For 2017, the total provision for loan losses
decreased $43 million compared to 2016, driven primarily by
lower net charge-offs and reserves associated with energy-
related commercial exposures, offset partially by increased
reserves held for hurricane-related losses.
Our quarterly review processes to determine the level of
reserves and provision are informed by trends in our LHFI
portfolio (including historical loss experience, expected loss
calculations, delinquencies, performing status, size and
composition of the loan portfolio, and concentrations within the
portfolio) combined with a view on economic conditions. In
addition to internal credit quality metrics, the ALLL estimate is
impacted by other indicators of credit risk associated with the
portfolio, such as geopolitical and economic risks, and the
increasing availability of credit and resultant higher levels of
leverage for consumers and commercial borrowers.
Allowance for Loan and Lease Losses
ALLL by Loan Segment
(Dollars in millions)
ALLL:
Commercial loans
Consumer loans
Total
Segment ALLL as a % of total ALLL:
Commercial loans
Consumer loans
Total
Segment LHFI as a % of total LHFI:
Commercial loans
Consumer loans
Total
2017
2016
2015
2014
2013
At December 31
Table 11
$1,101
634
$1,735
$1,124
585
$1,709
$1,047
705
$1,752
$986
951
$1,937
$946
1,098
$2,044
63%
37
100%
53%
47
100%
66%
34
100%
55%
45
100%
60%
40
100%
55%
45
100%
51%
49
100%
55%
45
100%
46%
54
100%
50%
50
100%
The ALLL increased $26 million, or 2%, from December 31,
2016, to $1.7 billion at December 31, 2017. The increase was
due primarily to increased reserves held for hurricane-related
losses and lower net charge-offs in 2017. The ALLL to period-
end LHFI ratio (excluding loans measured at fair value)
increased 2 basis points from December 31, 2016, to 1.21% at
December 31, 2017. The ratio of the ALLL to NPLs (excluding
NPLs measured at fair value) increased to 2.59x at December 31,
2017, compared to 2.03x at December 31, 2016, reflecting a
decrease in NPLs due primarily to the resolution of problem
energy-related loans as well as an increase in the ALLL.
41
NONPERFORMING ASSETS
Table 12 presents our NPAs at December 31:
(Dollars in millions)
Nonaccrual loans/NPLs:
Commercial loans:
C&I
CRE
Commercial construction
Total commercial NPLs
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Other direct
Indirect
Total consumer NPLs
Total nonaccrual loans/NPLs 1
OREO 2
Other repossessed assets
Nonperforming LHFS
Total NPAs
Accruing LHFI past due 90 days or more
Accruing LHFS past due 90 days or more
TDRs:
Accruing restructured loans
Nonaccruing restructured loans 1
Ratios:
2017
2016
2015
2014
2013
Table 12
$215
24
1
240
206
203
11
7
7
434
$674
$57
10
—
$741
$1,405
2
$2,468
286
$390
7
17
414
177
235
12
6
1
431
$845
$60
14
—
$919
$1,288
1
$2,535
306
$308
11
—
319
183
145
16
6
3
353
$672
$56
7
—
$735
$981
—
$2,603
176
$151
21
1
173
254
174
27
6
—
461
$634
$99
9
38
$780
$1,057
1
$2,592
273
$196
39
12
247
441
210
61
5
7
724
$971
$170
7
17
$1,165
$1,228
—
$2,749
391
NPLs to period-end LHFI
NPAs to period-end LHFI, nonperforming LHFS, OREO, and other
repossessed assets
0.47%
0.59%
0.49%
0.48%
0.76%
0.52
0.64
0.54
0.59
0.91
1 Nonaccruing restructured loans are included in total nonaccrual loans/NPLs.
2 Does not include foreclosed real estate related to loans insured by the FHA or guaranteed by the VA. Proceeds due from the FHA and the VA are recorded as a
receivable in Other assets in the Consolidated Balance Sheets until the property is conveyed and the funds are received. The receivable related to proceeds due from
the FHA and the VA totaled $45 million, $50 million, $52 million, $57 million, and $88 million at December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
Problem loans or loans with potential weaknesses, such as
nonaccrual loans, loans over 90 days past due and still accruing,
and TDR loans, are disclosed in the NPA table above. Loans with
known potential credit problems that may not otherwise be
disclosed in this table include accruing criticized commercial
loans, which are disclosed along with additional credit quality
information in Note 6, “Loans,” to the Consolidated Financial
Statements in this Form 10-K. At December 31, 2017 and
December 31, 2016, there were no known significant potential
problem loans that are not otherwise disclosed. See the "Critical
Accounting Policies" section of this MD&A for additional
information regarding our policy on loans classified as
nonaccrual.
NPAs decreased $178 million, or 19%, during 2017, and the
ratio of NPLs to period-end LHFI was 0.47% at December 31,
2017, down 12 basis points from December 31, 2016. These
declines were driven primarily by continued improvements in
the energy portfolio.
Nonperforming Loans
NPLs at December 31, 2017 totaled $674 million, a decrease of
$171 million, or 20%, from December 31, 2016, driven by a
decline in commercial NPLs.
Commercial NPLs decreased $174 million, or 42%, during
2017 driven by a $175 million, or 45%, reduction in C&I NPLs
due primarily to paydowns, sales, and the return to accrual status
of certain energy-related NPLs. Additionally, commercial
construction NPLs decreased $16 million, or 94%, due to the
sale of an NPL in the third quarter of 2017. The decrease in C&I
and commercial construction NPLs was offset partially by an
increase in CRE NPLs of $17 million due to the downgrade of
one borrower.
Consumer NPLs increased $3 million, or 1%, from
December 31, 2016, due primarily to an increase in residential
mortgage and indirect NPLs, offset largely by lower inflows of
new residential home equity NPLs.
42
Interest income on consumer nonaccrual loans, if received,
is recognized on a cash basis. Interest income on commercial
nonaccrual loans is not generally recognized until after the
principal amount has been reduced to zero. We recognized $32
million and $21 million of interest income related to nonaccrual
loans (which includes out-of-period interest for certain
commercial nonaccrual
loans) during 2017 and 2016,
respectively. If all such loans had been accruing interest
according to their original contractual terms, estimated interest
income of $43 million and $48 million would have been
recognized during 2017 and 2016, respectively.
Other Nonperforming Assets
OREO decreased $3 million, or 5%, during 2017 to $57 million
at December 31, 2017. Sales of OREO resulted in proceeds of
$60 million and $59 million during 2017 and 2016, resulting in
net gains of $10 million and $11 million, respectively, inclusive
of valuation reserves.
Most of our OREO properties are located in Florida,
Georgia, Virginia, and Maryland. Residential and commercial
real estate properties comprised 90% and 6%, respectively, of
the $57 million in total OREO at December 31, 2017, with the
remainder related to land. Upon foreclosure, the values of these
properties were re-evaluated and, if necessary, written down to
their then-current estimated fair value less estimated costs to sell.
Any further decreases in property values could result in
additional losses as they are regularly revalued. See the "Non-
recurring Fair Value Measurements" section within Note 18,
"Fair Value Election and Measurement," to the Consolidated
Financial Statements in this Form 10-K for additional
information.
Gains and losses on the sale of OREO are recorded in other
noninterest expense in the Consolidated Statements of Income.
Sales of OREO and the related gains or losses are highly
dependent on our disposition strategy. We are actively managing
and disposing of these assets to minimize future losses and to
maintain compliance with regulatory requirements.
Accruing loans past due 90 days or more included LHFI and
LHFS, and totaled $1.4 billion and $1.3 billion at December 31,
2017 and 2016, respectively. Of these, 98% and 97% were
government-guaranteed at December 31, 2017 and 2016,
respectively. Accruing LHFI past due 90 days or more increased
$117 million, or 9%, during 2017, driven by a $101 million
increase in guaranteed student loans and a $19 million increase
in guaranteed residential mortgages, offset slightly by a $5
million decrease in C&I loans.
Restructured Loans
To maximize the collection of loan balances, we evaluate
troubled loans on a case-by-case basis to determine if a loan
modification is appropriate. We pursue loan modifications when
there is a reasonable chance that an appropriate modification
would allow our client to continue servicing the debt. For loans
secured by residential real estate, if the client demonstrates a loss
of income such that the client cannot reasonably support a
modified loan, we may pursue short sales and/or deed-in-lieu
arrangements. For
income producing
loans secured by
commercial properties, we perform an in-depth and ongoing
programmatic review of a number of factors, including cash
flows, loan structures, collateral values, and guarantees to
identify loans within our income producing commercial loan
portfolio that are most likely to experience distress.
Based on our review of the aforementioned factors and our
assessment of overall risk, we evaluate the benefits of proactively
initiating discussions with our clients to improve a loan’s risk
profile. In some cases, we may renegotiate terms of their loans
so that they have a higher likelihood of continuing to perform.
To date, we have restructured loans in a variety of ways to help
our clients service their debt and to mitigate the potential for
additional losses. The restructuring methods offered to our
clients primarily include an extension of the loan's contractual
term and/or a reduction in the loan's original contractual interest
rate. In limited circumstances, loan modifications that forgive
contractually specified unpaid principal balances may also be
offered. For residential home equity lines nearing the end of their
draw period and for commercial loans, the primary restructuring
method is an extension of the loan's contractual term.
Loans with modifications deemed
to be economic
concessions resulting from borrower financial difficulties are
reported as TDRs. Accruing loans may retain accruing status at
the time of restructure and the status is determined by, among
other things, the nature of the restructure, the borrower's
repayment history, and the borrower's repayment capacity.
Nonaccruing loans that are modified and demonstrate a
sustainable history of repayment performance in accordance
with their modified terms, typically six months, are usually
reclassified to accruing TDR status. Generally, once a loan
becomes a TDR, we expect that the loan will continue to be
reported as a TDR for its remaining life, even after returning to
accruing status (unless the modified rates and terms at the time
of modification were available in the market at the time of the
modification, or if the loan is subsequently remodified at market
rates). Some restructurings may not ultimately result in the
complete collection of principal and interest (as modified by the
terms of the restructuring), culminating in default, which could
result
losses. These potential
incremental losses are factored into our ALLL estimate. The level
of re-defaults will likely be affected by future economic
conditions. See Note 6, “Loans,” to the Consolidated Financial
Statements in this Form 10-K for additional information.
in additional
incremental
At December 31, 2017, our total TDR portfolio totaled $2.8
billion and was comprised of $2.7 billion, or 97%, of consumer
loans (predominantly first and second lien residential mortgages
and home equity lines of credit) and $70 million, or 3%, of
commercial loans. Total TDRs decreased $87 million from
December 31, 2016, driven by a $67 million, or 3%, reduction
in accruing TDRs due primarily to paydowns and payoffs of
nonguaranteed residential mortgages during 2017. Nonaccruing
TDRs decreased $20 million, or 7%, from December 31, 2016.
Generally, interest income on restructured loans that have
met sustained performance criteria and returned to accruing
status is recognized according to the terms of the restructuring.
Such interest income recognized was $108 million and $112
million for 2017 and 2016, respectively. If all such loans had
been accruing interest according to their original contractual
terms, estimated interest income of $130 million and $138
million for 2017 and 2016, respectively, would have been
recognized.
43
SELECTED FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE
The following is a discussion of the more significant financial
assets and financial liabilities that are measured at fair value on
the Consolidated Balance Sheets at December 31, 2017 and
2016. For a complete discussion of our financial instruments
measured at fair value and the methodologies used to estimate
the fair values of our financial instruments, see Note 18, “Fair
Value Election and Measurement,” to the Consolidated Financial
Statements in this Form 10-K.
Trading Assets and Liabilities and Derivative Instruments
Trading assets and derivative instruments decreased $974
million, or 16%, compared to December 31, 2016. This decrease
was due primarily to decreases in U.S. Treasury securities,
trading loans, derivative instruments, federal agency securities,
municipal securities, and CP, offset partially by an increase in
agency MBS. These changes were driven by normal activity in
the trading portfolio product mix as we manage our business and
continue to meet our clients' needs. Trading liabilities and
derivative instruments decreased $68 million, or 5%, compared
to December 31, 2016, driven by a decrease in U.S. Treasury
securities, offset in part by increases in corporate and other debt
securities, derivative instruments, and equity securities. For
composition and valuation assumptions related to our trading
products, as well as additional information on our derivative
instruments, see Note 4, “Trading Assets and Liabilities and
Derivative Instruments,” Note 17, “Derivative Financial
Instruments,” and
the “Trading Assets and Derivative
Instruments and Securities Available for Sale” section of Note
18, “Fair Value Election and Measurement,” to the Consolidated
Financial Statements in this Form 10-K. Also, for a discussion
of market risk associated with our trading activities, refer to the
“Market Risk Management—Market Risk from Trading
Activities” section of this MD&A.
Securities Available for Sale
(Dollars in millions)
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities 1
Total securities AFS
December 31, 2017
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Table 13
$4,361
257
618
22,616
2,121
55
862
6
17
472
$31,385
$2
3
7
222
3
4
7
2
—
—
$250
$32
1
8
134
38
—
3
—
—
3
$219
$4,331
259
617
22,704
2,086
59
866
8
17
469
$31,416
1 At December 31, 2017, the fair value of other equity securities was comprised of the following: $15 million of FHLB of Atlanta stock, $403 million of Federal
Reserve Bank of Atlanta stock, $49 million of mutual fund investments, and $2 million of other.
(Dollars in millions)
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities 1
Total securities AFS
December 31, 2016
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$5,486
310
279
22,379
1,263
71
257
8
34
642
$30,729
$5
5
5
311
2
3
—
2
1
1
$335
$86
2
5
254
39
—
5
—
—
1
$392
$5,405
313
279
22,436
1,226
74
252
10
35
642
$30,672
1 At December 31, 2016, the fair value of other equity securities was comprised of the following: $132 million of FHLB of Atlanta stock, $402 million of Federal
Reserve Bank of Atlanta stock, $102 million of mutual fund investments, and $6 million of other.
44
(Dollars in millions)
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
ABS
Corporate and other debt securities
Other equity securities 1
Total securities AFS
December 31, 2015
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$3,460
402
156
22,508
369
92
11
37
533
$27,568
$3
10
8
393
4
2
2
1
1
$424
$14
1
—
146
4
—
1
—
1
$167
$3,449
411
164
22,755
369
94
12
38
533
$27,825
1 At December 31, 2015, the fair value of other equity securities was comprised of the following: $32 million of FHLB of Atlanta stock, $402 million of Federal
Reserve Bank of Atlanta stock, $93 million of mutual fund investments, and $6 million of other.
Maturity Distribution of Debt Securities Available for Sale
Table 14
(Dollars in millions)
Amortized Cost 1:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Total debt securities
Fair Value 1:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Due in 1 Year
or Less
Due After 1
Year through
5 Years
December 31, 2017
Due After 5
Years through
10 Years
Due After 10
Years
Total
$—
121
6
2,686
—
—
—
—
7
$2,820
$—
123
6
2,748
—
—
—
—
7
$2,884
$2,322
46
49
7,937
315
55
12
6
10
$10,752
$2,305
47
52
7,980
308
59
12
8
10
$10,781
$2,039
4
149
11,781
1,547
—
813
—
—
$16,333
$2,026
4
153
11,763
1,525
—
816
—
—
$16,287
$—
86
414
212
259
—
37
—
—
$1,008
$—
85
406
213
253
—
38
—
—
$995
$4,361
257
618
22,616
2,121
55
862
6
17
$30,913
$4,331
259
617
22,704
2,086
59
866
8
17
$30,947
—%
Total debt securities
Weighted average yield 2:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
1.99%
3.96
3.75
2.80
2.44
5.50
3.18
2.16
2.79
2.71%
1 The amortized cost and fair value of investments in debt securities are presented based on remaining contractual maturity, with the exception of MBS and ABS,
which are based on estimated average life. Actual cash flows may differ from contractual maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
2 Weighted average yields are based on amortized cost and presented on an FTE basis.
1.82%
3.19
4.78
2.46
1.97
5.50
2.26
1.95
2.50
2.34%
2.19%
2.91
3.77
2.92
2.49
—
3.18
7.20
—
2.81%
2.81
3.57
3.28
2.76
—
3.42
—
—
3.23%
5.10
6.31
3.27
—
6.00
—
—
3.19
3.36%
Total debt securities
—%
45
The securities AFS portfolio is managed as part of our overall
liquidity management and ALM process to optimize income and
portfolio value over an entire interest rate cycle while mitigating
the associated risks. Changes in the size and composition of the
portfolio reflect our efforts to maintain a high quality, liquid
portfolio, while managing our interest rate risk profile. The
amortized cost of the portfolio increased $656 million during the
year ended December 31, 2017, due primarily to increased
holdings of agency residential and commercial MBS, non-
agency commercial MBS, and municipal securities, offset
largely by a decline in U.S. Treasury securities and a reduction
in other equity securities due to decreased holdings of FHLB of
Atlanta stock and mutual fund investments. The fair value of the
securities AFS portfolio increased $744 million compared to
December 31, 2016, due primarily to the aforementioned
changes in the portfolio mix and an $88 million increase in net
unrealized gains. At December 31, 2017, the overall securities
AFS portfolio was in a $31 million net unrealized gain position,
compared to a net unrealized loss position of $57 million at
December 31, 2016.
During the fourth quarter of 2017, we sold and subsequently
reinvested approximately $3 billion of securities AFS with a
similar mix and higher yields (primarily within U.S. Treasury
securities and agency residential MBS), resulting in net realized
losses of $109 million for the fourth quarter of 2017. We expect
this repositioning to increase annual interest income by
approximately $20 million beginning in 2018, all else being
equal. For the year ended December 31, 2017, we recorded $108
million in net realized losses related to the sale of securities AFS,
compared to net realized gains of $4 million and $21 million for
the years ended December 31, 2016 and 2015, respectively.
OTTI credit losses recognized in earnings for both the year ended
December 31, 2017 and 2015 were immaterial and there were
no OTTI credit losses recognized in earnings for the year ended
December 31, 2016. For additional information on our
accounting policies, composition, and valuation assumptions
related to the securities AFS portfolio, see Note 1, "Significant
Accounting Policies," to our 2016 Annual Report on Form 10-
K, as well as Note 5, "Securities Available for Sale," and the
“Trading Assets and Derivative Instruments and Securities
Available for Sale” section of Note 18, “Fair Value Election and
Measurement,” to the Consolidated Financial Statements in this
Form 10-K.
For the year ended December 31, 2017, the average yield
on the securities AFS portfolio was 2.49%, compared to 2.29%
for the year ended December 31, 2016. The increase in average
yield was due primarily to shifts in portfolio mix, lower premium
amortization, and higher benchmark interest rates in the current
year. See additional discussion related to average yields on
securities AFS in the "Net Interest Income/Margin" section of
this MD&A.
The securities AFS portfolio had an effective duration of
4.5 years at December 31, 2017 compared to 4.6 years at
December 31, 2016. Effective duration is a measure of price
sensitivity of a bond portfolio to an immediate change in market
interest rates, taking into consideration embedded options. An
effective duration of 4.5 years suggests an expected price change
of approximately 4.5% for a 100 basis point instantaneous and
parallel change in market interest rates.
The credit quality and liquidity profile of the securities AFS
portfolio remained strong at December 31, 2017 and,
consequently, we believe that we have the flexibility to respond
to changes in the economic environment and take actions as
opportunities arise to manage our interest rate risk profile and
balance liquidity risk against investment returns. Over the longer
term, the size and composition of the securities AFS portfolio
will reflect balance sheet trends, our overall liquidity objectives,
and interest rate risk management objectives. Accordingly, the
size and composition of the securities AFS portfolio could
change over time.
Federal Home Loan Bank and Federal Reserve Bank Stock
We previously acquired capital stock in the FHLB of Atlanta as
a precondition for becoming a member of that institution. As a
member, we are able to take advantage of competitively priced
advances as a wholesale funding source and to access grants and
low-cost
loans for affordable housing and community
development projects, among other benefits. At December 31,
2017, we held a total of $15 million of capital stock in the FHLB
of Atlanta, a decrease of $117 million compared to December 31,
2016 due to a decline in long-term FHLB advances over the same
period. See additional information regarding changes in our
long-term debt in the "Borrowings" section of this MD&A. For
the years ended December 31, 2017, 2016, and 2015, we
recognized dividends related to FHLB capital stock of $6
million, $5 million, and $11 million, respectively.
Similarly, to remain a member of the Federal Reserve
System, we are required to hold a certain amount of capital stock,
determined as either a percentage of the Bank’s capital or as a
percentage of total deposit liabilities. At December 31, 2017, we
held $403 million of Federal Reserve Bank of Atlanta stock, an
increase of $1 million compared to December 31, 2016. For the
years ended December 31, 2017, 2016, and 2015, we recognized
dividends related to Federal Reserve Bank of Atlanta stock of
$9 million, $8 million, and $24 million, respectively.
46
DEPOSITS
Composition of Average Deposits
(Dollars in millions)
Noninterest-bearing deposits
Interest-bearing deposits:
NOW accounts
Money market accounts
Savings
Consumer time
Other time
Total consumer and commercial deposits
Brokered time deposits
Foreign deposits
Total deposits
Year Ended December 31
2016
$43,400
2017
$43,655
2015
$42,102
45,009
53,592
6,519
5,626
5,148
159,549
941
421
$160,911
40,949
53,795
6,285
5,852
3,908
154,189
926
123
$155,238
35,161
50,518
6,165
6,443
3,813
144,202
888
218
$145,308
Table 15
% of Total Deposits
2016
2017
2015
27%
28%
29%
28
33
4
4
3
99
1
—
100%
26
35
4
4
2
99
1
—
100%
24
35
4
4
3
99
1
—
100%
During 2017, we experienced continued deposit growth across
most of our product categories, while maintaining a favorable
deposit mix. See Table 2, Table 3, and the "Net Interest Income/
Margin" section in this MD&A for additional information
regarding average deposit balances, rates paid, and associated
impacts on net interest income. See Note 5, "Securities Available
for Sale," to the Consolidated Financial Statements in this Form
10-K for information regarding collateral pledged to secure
public deposits.
Average consumer and commercial deposits increased $5.4
billion, or 3%, compared to 2016, driven by broad-based growth
across both of our business segments, which reflects success in
deepening and growing client relationships. Consumer deposit
growth was driven by targeted client outreach, improved
execution across our branch network, leveraging new pricing
capabilities, and a daily focus on meeting our clients' deposit
needs across all channels. Commercial deposit growth was
driven by our continued focus on meeting client needs through
the deployment of new deposit product offerings combined with
the growth of our liquidity specialist team, which attracted new
deposits and business relationships.
Consumer and commercial deposit growth remains one of
our key areas of focus. During 2017, we continued to deepen our
relationships with existing clients, grow our client base, and
increase deposits, while managing the rates we paid for deposits.
We maintained pricing discipline through a judicious use of
competitive rates in select products and markets. Looking
forward to 2018, we continue to be focused on maximizing the
value proposition of deposits for our clients, outside of the rate
paid, by meeting more of our clients' needs through strategic
investments in talent and technology.
Contractual maturities of time deposits in denominations of $100,000 or more at December 31, 2017 are presented in Table 16:
(Dollars in millions)
Remaining Contractual Maturity:
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
Consumer and
Other Time
Brokered Time
Total
Table 16
$609
521
1,103
4,004
$6,237
$37
27
41
880
$985
$646
548
1,144
4,884
$7,222
Refer to the "Contractual Obligations" section of this MD&A and Note 11, "Borrowings and Contractual Commitments," to the
Consolidated Financial Statements in this Form 10-K for additional information regarding time deposit maturities.
47
BORROWINGS
Short-Term Borrowings
Short-term borrowings at December 31 consisted of the
following:
(Dollars in millions)
Funds purchased
Securities sold under agreements to
repurchase
Other short-term borrowings
Total short-term borrowings
Table 17
2016
$2,116
1,633
1,015
$4,764
2017
$2,561
1,503
717
$4,781
Our short-term borrowings at December 31, 2017 increased $17
million from December 31, 2016, driven by a $445 million
increase in funds purchased, offset largely by decreases of $298
million and $130 million in other short-term borrowings and
securities sold under agreements to repurchase, respectively. The
reduction in other short-term borrowings was due to decreases
in master notes outstanding, dealer collateral held, and other
borrowings in connection with the December 2016 Pillar
acquisition of $133 million, $83 million, and $81 million,
respectively.
Long-Term Debt
Long-term debt at December 31 consisted of the following:
(Dollars in millions)
Parent Company Only:
Senior, fixed rate
Senior, variable rate
Subordinated, fixed rate
Junior subordinated, variable rate
Total
Less: Debt issuance costs
Total Parent Company debt
Subsidiaries 1:
Senior, fixed rate 2
Senior, variable rate
Subordinated, fixed rate
Total
Less: Debt issuance costs
Total subsidiaries debt
Total long-term debt 3
Table 18
2017
2016
$3,379
267
200
628
4,474
8
4,466
3,609
512
1,206
5,327
8
5,319
$3,818
314
200
627
4,959
9
4,950
2,539
2,613
1,651
6,803
5
6,798
$9,785
$11,748
1 77% and 88% of total subsidiary debt was issued by the Bank as of December
31, 2017 and 2016, respectively.
2 Includes leases and other obligations that do not have a stated interest rate.
3 Includes $530 million and $963 million of long-term debt measured at fair value
at December 31, 2017 and 2016, respectively.
During the year ended December 31, 2017, our long-term debt
decreased by $2.0 billion, or 17%. This decrease was driven by
$2.8 billion of FHLB advance terminations and maturities, $1.5
billion of senior note maturities, and $188 million of
48
subordinated note maturities. Partially offsetting
these
reductions were our issuances of $1.0 billion of 3-year fixed rate
senior notes, $300 million of 3-year floating rate senior notes,
and $1.0 billion of 5-year fixed rate senior notes under our Global
Bank Note program, as well as an increase in direct finance leases
of $212 million during the year ended December 31, 2017.
In the first quarter of 2018, we issued $500 million of 5-
year senior notes that pay a fixed annual coupon rate of 3.00%
under our Global Bank Note program. We may call these notes
beginning on August 2, 2018 under a "make-whole" provision,
and they mature on February 2, 2023. Also in the first quarter of
2018, we issued $750 million of 3-year fixed-to-floating rate
senior notes under our Global Bank Note program. The notes
pay a fixed annual coupon rate of 2.59% until January 29, 2020
and pay a floating coupon rate of 3-month LIBOR plus 29.75
basis points thereafter. We may call these notes beginning on
January 29, 2020, and they mature on January 29, 2021. Similar
to our debt issuances in 2017, these issuances allowed us to
supplement our funding sources at favorable borrowing rates and
pay down maturing borrowings.
CAPITAL RESOURCES
Regulatory Capital
Our primary federal regulator, the Federal Reserve, measures
capital adequacy within a framework
that sets capital
requirements relative to the risk profiles of individual banks. The
framework assigns risk weights to assets and off-balance sheet
risk exposures according to predefined classifications, creating
a base from which to compare capital levels. We measure capital
adequacy using the standardized approach to the FRB's Basel III
Final Rule. Basel III capital categories are discussed below.
CET1 is limited to common equity and related surplus (net
of treasury stock), retained earnings, AOCI, and common equity
minority interest, subject to limitations. Certain regulatory
adjustments and exclusions are made to CET1, including
removal of goodwill, other intangible assets, certain DTAs, and
certain defined benefit pension fund net assets. Further, banks
employing the standardized approach to Basel III were granted
a one-time permanent election to exclude AOCI from the
calculation of regulatory capital. We elected to exclude AOCI
from the calculation of our CET1.
Tier 1 capital includes CET1, qualified preferred equity
instruments, qualifying minority interest not included in CET1,
subject to limitations, and certain other regulatory deductions.
Tier 2 capital includes qualifying portions of subordinated debt,
trust preferred securities and minority interest not included in
Tier 1 capital, ALLL up to a maximum of 1.25% of RWA, and
a limited percentage of unrealized gains on equity securities.
Total capital consists of Tier 1 capital and Tier 2 capital.
To be considered "adequately capitalized," we are subject
to minimum CET1, Tier 1 capital, and Total capital ratios of
4.5%, 6%, and 8%, respectively, plus, in 2017 and 2016, CCB
amounts of 1.25% and 0.625%, respectively, are required to be
maintained above the minimum capital ratios. The CCB will
continue to increase each year through January 1, 2019, when
the CCB amount will be fully phased-in at 2.5% above the
minimum capital ratios. The CCB places restrictions on the
amount of retained earnings that may be used for capital
distributions or discretionary bonus payments as risk-based
capital ratios approach their respective “adequately capitalized”
minimum capital ratios plus the CCB. To be considered “well-
capitalized,” Tier 1 and Total capital ratios of 6% and 10%,
respectively, are required.
We are also subject to a Tier 1 leverage ratio requirement,
which measures Tier 1 capital against average total assets less
certain deductions, as calculated in accordance with regulatory
guidelines. The minimum leverage ratio threshold is 4% and is
not subject to the CCB.
A transition period applies to certain capital elements and
risk weighted assets, where phase-in percentages are applicable
in the calculations of capital and RWA. One of the more
significant transitions required by the Basel III Final Rule relates
to the risk weighting applied to MSRs, which will impact the
CET1 ratio during the transition period when compared to the
CET1 ratio that is calculated on a fully phased-in basis.
Specifically, the fully phased-in risk weight of MSRs is 250%,
while the risk weight to be applied during the transition period
is 100%.
In the third quarter of 2017, the OCC, the FRB, and the FDIC
("the federal banking agencies") issued two NPRs in an effort to
simplify certain aspects of the capital rules. In August 2017, a
Transitions NPR was issued, which would extend certain
transition provisions currently in the capital rules for banks with
less than $250 billion in total consolidated assets. In September
2017, a Simplifications NPR was issued, which would apply a
simpler treatment for certain exposures and capital calculations
for banks with less than $250 billion in total consolidated assets.
The Simplifications NPR also includes certain clarifications and
technical amendments to the capital rules.
In November 2017, the federal banking agencies finalized
a rule extending the existing capital requirements for MSRs and
certain other items. The rule was finalized to prevent different
rules from taking effect while the federal banking agencies
consider a broader simplification of the capital rules. The final
rule applies only to banks that are not subject to advanced
approach capital rules, which are generally banks with less than
$250 billion in total consolidated assets and less than $10 billion
in total foreign exposure. The rule became effective on January
1, 2018. The transition period was previously applicable from
January 1, 2015 through December 31, 2017, but with the
finalization of the aforementioned Transitions NPR, the
transition period has been extended into 2018.
Table 19 presents the Company's transitional Basel III
regulatory capital metrics.
Regulatory Capital Metrics 1
(Dollars in millions)
Regulatory capital:
CET1
Tier 1 capital
Total capital
Assets:
RWA
Average total assets for leverage ratio
Risk-based ratios:
CET1
CET1 - fully phased-in 2
Tier 1 capital
Total capital
Leverage
Total shareholders’ equity to assets
December 31,
2017
December 31,
2016
December 31,
2015
Table 19
$17,141
19,622
23,028
$175,950
200,141
$16,953
18,186
21,685
$176,825
197,272
$16,421
17,804
20,668
$164,851
183,763
9.74%
9.59%
9.96%
9.59
11.15
13.09
9.80
12.21
9.43
10.28
12.26
9.22
11.53
9.80
10.80
12.54
9.69
12.28
1 We calculated these measures based on the methodology specified by our primary regulator, which may differ from the calculations used by other financial services
companies that present similar metrics.
2 The CET1 ratio on a fully phased-in basis at December 31, 2017 is estimated. See Table 30, "Selected Financial Data and Reconcilement of Non-U.S. GAAP
Measures," in this MD&A for a reconciliation of our transitional CET1 ratio to our fully phased-in, estimated CET1 ratio.
All of our capital ratios increased compared to December 31,
2016, driven primarily by growth in retained earnings and a
decrease in RWA due to decreased off-balance sheet exposures.
In addition, the Tier 1 capital and Total capital ratios were both
favorably impacted by our Series G and Series H preferred stock
issuances in 2017, detailed in the "Capital Actions" section
below. At December 31, 2017, our capital ratios were well above
current regulatory requirements.
Our estimate of the fully phased-in CET1 ratio of 9.59% at
December 31, 2017 considers a 250% risk-weighting for
residential and commercial mortgage servicing rights, which is
the primary driver for the difference in the transitional CET1
ratio compared to the estimated fully phased-in ratio at
December 31, 2017. Our estimated fully phased-in ratio is in
excess of the 4.5% minimum CET1 ratio, and is also in excess
of the 7.0% limit that includes the minimum level of 4.5% plus
the 2.5% fully phased-in CCB. See Table 30 , "Selected Financial
Data and Reconcilement of Non-U.S. GAAP Measures," in this
MD&A for a reconciliation of our fully phased-in CET1 ratio.
Also see Note 13, "Capital," to the Consolidated Financial
Statements in this Form 10-K for additional information
regarding our regulatory capital adequacy requirements and
metrics.
49
Capital Actions
We declared and paid common dividends of $634 million, or
$1.32 per common share, during the year ended December 31,
2017, compared to $498 million, or $1.00 per common share,
during the year ended December 31, 2016. Additionally, we paid
dividends on our preferred stock of $94 million, $66 million, and
$64 million during the years ended December 31, 2017, 2016,
and 2015, respectively.
Various regulations administered by federal and state bank
regulatory authorities restrict the Bank's ability to distribute its
retained earnings. At December 31, 2017, 2016, and 2015, the
Bank's capacity to pay cash dividends to the Parent Company
under these regulations totaled approximately $2.5 billion, $2.5
billion, and $2.7 billion, respectively.
During the first quarter of 2017, we repurchased $414
million of our outstanding common stock, which included $240
million under our 2016 capital plan and an incremental $174
million pursuant to the 1% of Tier 1 capital de minimis exception
allowed under the applicable 2016 Capital Plan Rule. During the
second quarter of 2017, we repurchased an additional $240
million of our outstanding common stock at market value, which
completed our authorized $960 million of common equity
repurchases as approved by the Board in conjunction with the
2016 capital plan.
In the second quarter of 2017, we announced capital plans
in response to the Federal Reserve's review of and non-objection
to our 2017 capital plan submitted in conjunction with the 2017
CCAR. Our 2017 capital plan includes increases in our share
repurchase program and quarterly common stock dividend,
while maintaining our level of preferred stock dividends.
Specifically, the 2017 capital plan authorized the repurchase of
up to $1.32 billion of our outstanding common stock to be
completed between the third quarter of 2017 and the second
quarter of 2018, as well as a 54% increase in our quarterly
common stock dividend from $0.26 per share to $0.40 per share,
beginning in the third quarter of 2017. During the second half
of 2017, we repurchased $660 million of our outstanding
common stock at market value as a part of this 2017 capital plan.
In the first half of 2018, we expect to repurchase approximately
$660 million of additional outstanding common stock at market
value, which would complete our repurchase of authorized
shares as approved by the Board in conjunction with the 2017
capital plan. We currently plan to submit our 2018 capital plan
for review by the Federal Reserve in conjunction with the 2018
CCAR in April 2018.
In May 2017, we issued depositary shares representing
ownership interest in 7,500 shares of Perpetual Preferred Stock,
Series G, with no par value and $100,000 liquidation preference
per share (the "Series G Preferred Stock"). As a result of this
issuance, we received net proceeds of approximately $743
million after the underwriting discount, but before expenses. The
Series G Preferred Stock has no stated maturity and will not be
subject to any sinking fund or other obligation to redeem,
repurchase, or retire the shares. Dividends for the shares are
noncumulative and, if declared, will be payable semi-annually
beginning on December 15, 2017 through June 15, 2022 at a rate
per annum of 5.05%, and payable quarterly beginning on
September 15, 2022 at a rate per annum equal to the three-month
LIBOR plus 3.10%. By its terms, we may redeem the Series G
Preferred Stock on any dividend payment date occurring on or
50
after June 15, 2022 or at any time within 90 days following a
regulatory capital event, at a redemption price of $100,000 per
share plus any declared and unpaid dividends. Except in certain
limited circumstances, the Series G Preferred Stock does not
have any voting rights.
In November 2017, we
issued depositary shares
representing ownership interest in 5,000 shares of Perpetual
Preferred Stock, Series H, with no par value and $100,000
liquidation preference per share (the "Series H Preferred Stock").
The Series H Preferred Stock has no stated maturity and will not
be subject to any sinking fund or other obligation to redeem,
repurchase, or retire the shares. Dividends for the shares are
noncumulative and, if declared, will be payable semi-annually
beginning on June 15, 2018 through December 15, 2027 at a rate
per annum of 5.125%, and payable quarterly beginning on March
15, 2028 at a rate per annum equal to the three-month LIBOR
plus 2.79%. By its terms, we may redeem the Series H Preferred
Stock on any dividend payment date occurring on or after
December 15, 2027 or at any time within 90 days following a
regulatory capital event, at a redemption price of $100,000 per
share plus any declared and unpaid dividends. Except in certain
limited circumstances, the Series H Preferred Stock does not
have any voting rights. As a result of this issuance, we received
net proceeds of approximately $496 million after
the
underwriting discount, but before expenses, and we intend to use
the net proceeds for general corporate purposes, including the
previously announced redemption of all outstanding 5.875%
Series E Preferred Stock depositary shares on March 15, 2018.
The redemption of Series E Preferred Stock depositary shares is
expected to reduce our Tier 1 capital and Total capital ratios by
approximately 25 basis points, all else being equal. See Part II,
Item 5 of this Form 10-K for additional information regarding
our share repurchase activity, and Note 13, "Capital," to the
Consolidated Financial Statements in this Form 10-K for
additional information regarding our capital actions.
Given our strong capital position combined with our
improved earnings trajectory, we should have capacity to
increase capital returns to our owners, the specifics of which will
depend upon our rigorous capital planning process.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are integral to understanding
our financial performance and are described in detail in Note 1,
“Significant Accounting Policies,” to the Consolidated Financial
Statements in this Form 10-K. We have identified certain
accounting policies as being critical because (1) they require
judgment about matters that are highly uncertain and (2) different
estimates that could be reasonably applied would result in
materially different outcomes with respect to the recognition and
measurement of certain assets, liabilities, commitments, and
contingencies, with corresponding impacts on earnings. Our
accounting and reporting policies are in accordance with U.S.
GAAP, and they conform to general practices within the financial
services industry. We have established detailed policies and
control procedures that are intended to ensure that these critical
accounting estimates are well controlled and applied consistently
from period to period, and that the process for changing
methodologies occurs in an appropriate manner. The following
is a description of our current critical accounting policies.
Contingencies
We face uncertainty with respect to the outcomes of various
contingencies, including the allowance for credit losses and legal
and regulatory matters.
Allowance for Credit Losses
The allowance for credit losses is composed of the ALLL and
the reserve for unfunded commitments. The ALLL represents
our estimate of probable losses inherent in the LHFI portfolio
based on current economic conditions. The ALLL is increased
by the provision for loan losses and reduced by loan charge-offs,
net of recoveries. The ALLL is determined based on our review
of certain LHFI that are individually evaluated for impairment
and pools of LHFI with similar risk characteristics that are
evaluated on a collective basis. Our loss estimate includes an
assessment of internal and external influences on credit quality
that may not be fully reflected in the historical loss, risk-rating,
or other indicative data.
Large commercial nonaccrual loans and certain commercial
and consumer loans whose terms have been modified in a TDR,
are reviewed to determine the amount of specific allowance
required in accordance with applicable accounting guidance. For
this purpose, we consider the most probable source of repayment,
including the present value of the loan's expected future cash
flows, the fair value of the underlying collateral less costs of
disposition, or the loan's estimated market value. We use
assumptions and methodologies that are relevant to assess the
extent of impairment in the portfolio and employ judgment in
assigning or estimating internal risk ratings, market and
collateral values, discount rates, and loss rates.
General allowances are established for loans and leases
grouped into pools that have similar characteristics. The ALLL
Committee estimates probable losses by evaluating quantitative
and qualitative factors for each loan portfolio segment, including
net charge-off trends, internal risk ratings, changes in internal
risk ratings, loss forecasts, collateral values, geographic location,
delinquency rates, nonperforming and restructured loan status,
origination channel, product mix, underwriting practices,
industry conditions, and economic trends. In addition to these
factors, the consumer and residential portfolio segments consider
borrower FICO scores and the commercial portfolio segment
considers single name borrower concentration.
Estimated collateral values are based on appraisals, broker
price opinions, automated valuation models, other collateral-
specific information, and/or relevant market information,
supplemented when applicable with valuations performed by
internal valuation professionals. Their values reflect an orderly
disposition, inclusive of marketing costs. In limited instances,
we adjust externally provided appraisals for justifiable and well
supported reasons, such as an appraiser not being aware of certain
collateral-specific factors or recent sales information. Appraisals
generally represent the “as is” value of the collateral but may be
adjusted based on the intended disposition strategy.
Our determination of the ALLL for commercial loans is
sensitive to the assigned internal risk ratings and inherent
expected loss rates. A downgrade of one level in the PD risk
ratings for all commercial loans and leases would have increased
the ALLL by approximately $474 million at December 31, 2017.
If the estimated loss severity rates for the entire commercial loan
portfolio were increased by 10%, the ALLL for the commercial
portfolio would increase by approximately $107 million at
December 31, 2017.
The allowance for consumer loans is also sensitive to
changes in estimated loss severity rates. If the estimated loss
severity rates for these loans increased by 10%, the total ALLL
for the consumer portfolio would increase by approximately $46
million at December 31, 2017. These sensitivity analyses are
intended to provide insights into the impact of adverse changes
in risk rating and estimated loss severity rates and do not imply
any expectation of future deterioration in the risk ratings or loss
rates. Given current processes employed, management believes
the risk ratings and inherent loss rates currently assigned are
appropriate. It is possible that others, given the same information,
could reach different conclusions that could be material to our
financial statements.
In addition to the ALLL, we estimate probable losses related
to unfunded lending commitments, such as letters of credit and
binding unfunded loan commitments. Unfunded lending
commitments are analyzed and segregated by risk using our
internal risk rating scale. These risk classifications, in
combination with probability of commitment usage, and any
other pertinent information, are utilized in estimating the reserve
for unfunded lending commitments.
Our financial results are affected by the changes in the
allowance for credit losses. This process involves our analysis
of complex internal and external variables, and it requires that
we exercise judgment to estimate an appropriate allowance for
credit losses. Changes in the financial condition of individual
borrowers, economic conditions, or the condition of various
markets in which collateral may be sold could require us to
significantly decrease or increase the level of the allowance for
credit losses. Such an adjustment could materially affect net
income. For additional discussion of the ALLL see the
“Allowance for Credit Losses” and “Nonperforming Assets”
sections in this MD&A as well as Note 1, “Significant
Accounting Policies,” Note 6, “Loans,” and Note 7, “Allowance
for Credit Losses,” to the Consolidated Financial Statements in
this Form 10-K.
Legal and Regulatory Matters
We are parties to numerous claims and lawsuits arising in the
course of our normal business activities, some of which involve
claims for substantial amounts, and the outcomes of which are
not within our complete control or may not be known for
prolonged periods of time. Management is required to assess the
probability of loss and amount of such loss, if any, in preparing
our financial statements.
We evaluate the likelihood of a potential loss from legal or
regulatory proceedings to which we are a party. We record a
liability for such claims only when a loss is considered probable
and the amount can be reasonably estimated. The liability is
recorded in Other liabilities in the Consolidated Balance Sheets
and the related expense is recorded in the applicable category of
Noninterest expense, depending on the nature of the legal matter,
51
in the Consolidated Statements of Income. Significant judgment
may be required in determining both probability of loss and
whether an exposure is reasonably estimable. Our estimates are
subjective based on the status of the legal or regulatory
proceedings, the merits of our defenses, and consultation with
in-house and outside legal counsel. In many such proceedings,
it is not possible to determine whether a liability has been
incurred or to estimate the ultimate or minimum amount of that
liability until the matter is close to resolution. As additional
information becomes available, we reassess the potential liability
related to pending claims and may revise our estimates.
Due to the inherent uncertainties of the legal and regulatory
processes in the jurisdictions in which we operate, our estimates
may be materially different than the actual outcomes, which
could have material effects on our business, financial condition,
and results of operations. See Note 19, “Contingencies,” to the
Consolidated Financial Statements in this Form 10-K for further
discussion.
Estimates of Fair Value
The objective of a fair value measurement is to use market-based
inputs or assumptions, when available, to estimate the price that
would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. When observable market prices from
transactions for identical assets or liabilities are not available,
we evaluate pricing for similar assets or liabilities. If observable
market prices for such assets or liabilities are unavailable or
impracticable to obtain, we employ other techniques for
estimating fair value (for example, obtaining third party price
quotes or using modeling techniques such as discounted cash
flows). The resulting valuation may include significant
judgments, particularly when the market for an asset or liability
is not active.
Fair value measurements for assets and liabilities that
include significant inputs that are not observable in the market
are classified as level 3 measurements in the fair value hierarchy.
We have instituted various processes and controls surrounding
these measurements to ensure appropriate methodologies are
utilized. We continue to maintain a cross-functional approach
when estimating the fair value of these difficult to value financial
instruments. This includes input from not only the related line
of business, but also from risk management and finance, to
ultimately arrive at an appropriate estimate of the instrument's
fair value. This process often involves the gathering of multiple
sources of information, including broker quotes, values provided
by pricing services, trading activity in other similar instruments,
market indices, and pricing matrices.
Modeling techniques incorporate our assessments regarding
assumptions that market participants would use in pricing the
asset or the liability, including assumptions about the risks
inherent in a particular valuation technique. These assessments
are subjective; the use of different assumptions could result in
material changes to these fair value measurements. We employed
significant unobservable inputs when estimating the fair value
of certain trading assets and derivatives, IRLCs, securities AFS,
residential LHFS, LHFI accounted for at fair value, and
residential MSRs.
52
We record all single-family residential MSRs at fair value
on a recurring basis. The fair value of residential MSRs is based
on discounted cash flow analyses and can vary significantly
quarter to quarter as market conditions and projected interest
rates change. We provide disclosure of the key economic
assumptions used to measure residential MSRs, including a
sensitivity analysis to adverse changes to these assumptions, in
Note 9, “Goodwill and Other Intangible Assets,” to the
Consolidated Financial Statements in this Form 10-K. This
sensitivity analysis does not take into account hedging activities
discussed in the “Other Market Risk” section of this MD&A.
Overall, the financial impact of the level 3 financial
instruments did not have a material impact on our liquidity or
capital. Table 20 discloses assets and liabilities measured at fair
value on a recurring basis that are classified as level 3
measurements.
Level 3 Assets and Liabilities
Table 20
(Dollars in millions)
Assets:
Trading assets and derivative instruments 1
Securities AFS
Residential LHFS
LHFI
Residential MSRs
Total level 3 assets
Total assets
Total assets measured at fair value on a
recurring basis
Level 3 assets as a % of total assets
Level 3 assets as a % of total assets
measured at fair value on a recurring basis
Liabilities:
Trading liabilities and derivative instruments
Total level 3 liabilities
Total liabilities
Total liabilities measured at fair value on a
recurring basis
Level 3 liabilities as a % of total liabilities
Level 3 liabilities as a % of total liabilities
measured at fair value on a recurring basis
1 Includes IRLCs.
December 31
2017
2016
$16
490
—
196
1,710
$2,412
$28
633
12
222
1,572
$2,467
$205,962
$204,875
39,992
42,073
1.2%
6.0%
$16
$16
1.2%
5.9%
$22
$22
$180,808
$181,257
2,049
2,392
—%
0.8%
—%
0.9%
Level 3 trading assets and derivative instruments decreased by
$12 million during the year ended December 31, 2017, due
primarily to the transfer of certain derivative instruments that are
not actively traded in the market. Level 3 securities AFS
decreased by $143 million during the year ended December 31,
2017, due primarily to the sale of FHLB of Atlanta stock as well
as the continued paydowns and sales on securities AFS. For a
detailed discussion regarding level 2 and 3 financial instruments
and valuation methodologies for each class of financial
instrument, see Note 18, “Fair Value Election and
Measurement,” and Note 1, “Significant Accounting Policies,”
to the Consolidated Financial Statements in this Form 10-K.
Goodwill
At December 31, 2017, our reporting units were Consumer and
Wholesale. See Note 20, "Business Segment Reporting," to the
Consolidated Financial Statements in this Form 10-K for further
discussion of our reportable business segments. We conduct a
goodwill impairment test at the reporting unit level at least
annually as of October 1, or more frequently as events occur or
circumstances change that would more-likely-than-not reduce
the fair value of a reporting unit below its carrying amount. Based
on our annual goodwill impairment test at October 1, 2017,
October 1, 2016, and October 1, 2015, we determined that for
each of our reporting units' with goodwill balances, the fair
values were in excess of their respective carrying values;
therefore, no goodwill impairment was recognized. For
additional information, see Note 1, “Significant Accounting
Policies,” and Note 9, “Goodwill and Other Intangible Assets,”
to the Consolidated Financial Statements in this Form 10-K.
In the analysis as of October 1, 2017, the carrying value of
equity of the reporting units, as well as Corporate Other, was
determined by allocating our total equity to each reporting unit
based on RWA using our actual Tier 1 capital ratio as of the
measurement date. Tier 1 capital was utilized as it most closely
aligns with equity as reported under U.S. GAAP. Appropriate
adjustments were made to each reporting unit’s allocation using
Tier 1 capital to conform with U.S. GAAP equity, namely to add
back equity tied to goodwill and other intangible assets. We view
this approach of determining the reporting units' carrying values
based on regulatory capital as an objective measurement of the
equity that a market participant would require to operate the
reporting units.
The goodwill impairment analysis estimates the fair value
of equity using discounted cash flow analyses. The inputs and
assumptions specific to each reporting unit are incorporated in
the valuations, including projections of future cash flows,
discount rates, and an estimated long-term growth rate. We assess
the reasonableness of the estimated fair value of the reporting
units by comparing implied valuation multiples with valuation
multiples from guideline companies and by comparing the
aggregate estimated fair value of the reporting units to our market
capitalization over a reasonable period of time. Significant and
sustained declines in our market capitalization could be an
indication of potential goodwill impairment.
Multi-year financial forecasts are developed for each
reporting unit by considering several key business drivers such
as new business initiatives, client service and retention standards,
market share changes, anticipated loan and deposit growth,
forward interest rates, historical performance, and industry and
economic trends, among other considerations that a market
participant would consider in valuing the reporting units.
Discount rates are estimated based on the Capital Asset Pricing
Model, which considers the risk-free interest rate, market risk
premium, beta, size premiums, and
risk
adjustments specific to a particular reporting unit. The discount
rates are also calibrated based on risks related to the projected
cash flows of each reporting unit.
idiosyncratic
The estimated fair values of the reporting units are highly
sensitive to changes in these estimates and assumptions;
therefore, in some instances, changes in these assumptions could
impact whether the fair value of a reporting unit is greater than
53
its carrying value. We perform sensitivity analyses around these
assumptions in order to assess the reasonableness of the
assumptions, and the resulting estimated fair values. Ultimately,
potential future changes in these assumptions may impact the
estimated fair value of a reporting unit and cause the fair value
of the reporting unit to be below its carrying value. Additionally,
the carrying value of a reporting unit's equity could change based
on market conditions, asset growth, preferred stock issuances,
or the risk profile of those reporting units, which could impact
whether or not the fair value of a reporting unit is less than
carrying value.
Income Taxes
We are subject to income tax laws of the U.S., its states, and the
municipalities where we conduct business. We estimate income
tax expense based on amounts expected to be owed to these
various tax jurisdictions. The estimated income tax expense or
benefit is reported in the Consolidated Statements of Income.
Accrued taxes represent the net estimated amount due to or
to be received from tax jurisdictions either currently or in the
future and are reported in Other liabilities or Other assets on the
Consolidated Balance Sheets. In estimating accrued taxes, we
assess the appropriate tax treatment of transactions and filing
positions after considering statutes, regulations,
judicial
precedent, and other pertinent information. The income tax laws
are complex and subject to different interpretations by the
taxpayer and the relevant government taxing authorities.
Significant judgment is required in determining the tax accruals
and in evaluating our tax positions, including evaluating
uncertain tax positions. Changes in the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations by the tax authorities, and
newly enacted statutory, judicial, and regulatory guidance that
could impact the relative merits and risks of tax positions. These
changes, when they occur, impact tax expense and can materially
affect our operating results. We review our tax positions quarterly
and make adjustments to accrued taxes as new information
becomes available.
Deferred income tax assets represent amounts available to
reduce income taxes payable in future years. Such assets arise
due to temporary differences between the financial reporting and
the tax bases of assets and liabilities, as well as from NOL and
tax credit carryforwards. We regularly evaluate the realizability
of DTAs. A valuation allowance is recognized for a DTA if, based
on the weight of available evidence, it is more-likely-than-not
that some portion or all of the DTA will not be realized. In
determining whether a valuation allowance is necessary, we
consider the level of taxable income in prior years to the extent
that carrybacks are permitted under current tax laws, as well as
estimates of future pre-tax and taxable income and tax planning
strategies that would, if necessary, be implemented. We currently
maintain a valuation allowance for certain state carryforwards
and certain other state DTAs. Since we expect to realize our
remaining federal and state DTAs, no valuation allowance is
deemed necessary against these DTAs at December 31, 2017.
For additional income tax information, refer to the "Provision
for Income Taxes" section in this MD&A as well as Note 1,
“Significant Accounting Policies,” and Note 14, “Income
Taxes,” to the Consolidated Financial Statements in this Form
10-K.
Employee Benefit Plans
We maintain various pension and other postretirement benefit
plans for employees who meet certain requirements. Continued
changes in the size and characteristics of the workforce or
changes in the plan's design could result in a partial settlement
of the pension plan. If lump sum payments were to exceed the
total of interest cost and service cost for the year, settlement
accounting would require immediate recognition through
earnings of any net actuarial gain or loss recorded in AOCI based
on the fair value of plan assets and plan obligations prior to
settlement, and recognition of any related settlement costs.
We utilize a full yield curve approach to estimate the service
and interest cost components of net periodic benefit expense for
pension and other postretirement benefit plans by applying
specific spot rates along the yield curve used in the determination
of the benefit obligation to the relevant projected cash flows. For
additional information on our pension and other postretirement
benefit plans see Note 1, “Significant Accounting Policies,” and
Note 15, “Employee Benefit Plans,” to the Consolidated
Financial Statements in this Form 10-K.
ENTERPRISE RISK MANAGEMENT
In the normal course of business, we are exposed to various risks.
We have established an ER framework to identify and manage
these risks and support key business objectives. Underlying this
framework are limits, metrics, policies, procedures, and
processes designed to effectively identify, monitor, and manage
risk in line with our overall risk appetite. Our risk management
philosophy is not to eliminate risk entirely but rather to only
accept risks that can be effectively managed and balanced with
acceptable returns while also meeting regulatory and safety/
soundness objectives.
The Board is responsible for establishing our desired overall
risk appetite and for oversight of risk and risk management
processes through the BRC. The BRC reports to and assists the
Board in overseeing and reviewing information regarding, but
not limited to, ER management (i.e., credit, market, liquidity,
operational,
technology, compliance, and strategic risk),
enterprise capital adequacy, liquidity adequacy, and material
regulatory matters. The CRO provides overall vision, direction,
and leadership regarding our ER management framework and
risk management culture. The CRO reports directly to the CEO
and the BRC.
ER establishes sound risk and governance frameworks,
policies, procedures, and processes that focus on identifying,
measuring, analyzing, managing, and reporting the risks that we
face. ER fulfills its independent risk oversight responsibilities
by developing, deploying, and monitoring enterprise-wide
frameworks and policies to manage risk. At its core, ER's
objective is to deliver sophisticated risk management capabilities
throughout the organization that:
• Align risk taking with the risk appetite established by the
Board,
54
•
•
Identify, measure, analyze, manage, escalate, and report risk
at the transaction, portfolio, and enterprise levels,
Support client facing businesses as they seek to balance risk
taking with business and safety/soundness objectives.
Promote sound processes and regulatory compliance,
• Optimize decision making,
•
• Maximize shareholder value, and
•
Support our purpose of Lighting the Way to Financial Well-
Being, support our performance promise of Leading the
Movement for Financial Well-Being, and conform to our
guiding principles of Client First, One Team, Executional
Excellence, and Profitable Growth.
Our risk management culture operates within the context of our
broader, purpose-driven corporate culture. Risk awareness
within our culture informs the manner in which teammates act
in the absence of specific guidance. SunTrust teammates are
expected to:
•
• Exhibit strong personal and professional risk leadership,
Put the client first,
integrity, and ethics in all business dealings,
• Understand
risks encountered and demonstrate a
commitment to managing risks through individual actions,
• Demonstrate honesty, fairness, and respect in all internal
and external interactions, and
• Emphasize the importance of executional excellence in all
activities.
Our ER structure and processes are founded upon a
comprehensive risk management roles and responsibilities
framework, which is critical to ensuring that we proactively
identify, measure, monitor, escalate, report, and control risks on
an ongoing basis. The risk management roles and responsibilities
framework delineates accountabilities across four dimensions.
• Risk Takers/Owners develop
to drive
opportunities; operate within the policies, standards, and
limits set by Risk Oversight; and escalate changes in the
business or the risk environment that could affect risk
appetite.
strategies
• Business Managers and Risk Administrators provide input
to and accept articulation of risk appetite in policies and
limits; identify, assess, and manage the risks the business
takes or is exposed to while conducting its activities; apply
and operate controls; and provide business analyses and
support.
• Risk Oversight provides credible, independent challenge to
risk takers; establishes the risk appetite framework and
facilitates risk appetite expression by the Board; sets limits
to the business; evaluates/approves limit exceptions; sets
risk management policies, standards, tools, methodologies,
and programs; and independently monitors and reports on
our aggregate portfolio view of risks.
• Risk Assurance provides independent assessments of risk
management and the internal control framework and
systems
include
compliance with policies and standards, effectiveness of the
independent risk management function, and completeness
and accuracy of information.
the Board. These assessments
to
In practice, risk measurement activities occur at all pertinent
levels of the organization, including at the business segment,
corporate functions, and enterprise-wide levels. ER uses a
variety of tools, reports, and analyses to evaluate specific
exposures in order to:
•
•
Provide a holistic view of risks,
Present quantitative and qualitative assessments of current
risks, which may be predictive of future risk trends and
levels, and
Promote transparency by fostering direct communication
between Executive Management/Board and key executives/
Risk Managers.
•
ER governance is supported by a number of chartered risk-
focused senior management committees. These “executive
committees” are responsible for ensuring effective risk
measurement and management within their respective areas of
authority, and include the ERC, ALCO, CC, PMC, and EBPC.
• ERC is chaired by the CRO and supports the CRO in
identifying, measuring, and managing the Bank’s aggregate
risk profile. ERC maintains a comprehensive perspective of
existing and prospective risks; the effectiveness of risk
management frameworks, policies and activities; and the
execution of risk management processes.
• ALCO is chaired by the CFO and ensures that proper
measurement, monitoring, management, and control
processes are in place to achieve our ALM and Liquidity
Risk Management goals.
• CC is also chaired by the CFO and ensures that the proper
measurement, monitoring, management, and control
processes are in place to achieve our strategic capital goals,
while also continuing to manage our risk-capital balance to
meet regulatory capital adequacy and stakeholder return
expectations.
PMC is chaired by the Wholesale Segment Executive and
facilitates the development of portfolio strategy that
addresses capital utilization, balance sheet optimization,
and risk concentrations.
•
• EBPC is chaired by the Chief Human Resources Officer and
is in place to assess and make determinations regarding our
business practices to ensure alignment with core purpose,
principles, and values, and to share best practices. EBPC
also serves as the forum for enterprise reputational risk
exposures.
The CEO, CFO, and CRO are members of each of these executive
committees. Additionally, other executive and senior officers are
members of these committees based upon their responsibilities
and subject matter expertise.
ER continually refines our risk governance structures,
frameworks and management limits, policies, procedures, and
processes
in our operating
environment and/or corporate goals and strategies.
to reflect ongoing changes
Credit Risk Management
Credit risk refers to the potential for economic loss arising from
the failure of clients to meet their contractual agreements on all
credit instruments, including on-balance sheet exposures from
loans, leases, and investment securities, as well as contingent
exposures including unfunded commitments, letters of credit,
credit derivatives, and counterparty risk under derivative
products. As credit risk is an essential component of many of the
products and services we provide to our clients, the ability to
accurately measure and manage credit risk is integral to
maintaining the long-run profitability and capital adequacy of
our business. We commit
to maintain and enhance a
comprehensive credit system to meet business requirements and
comply with evolving regulatory standards.
and
governance
frameworks
ER establishes and oversees adherence to the credit risk
management
policies,
independently measures, analyzes, and reports on loan portfolio
and risk trends, and actively participates in the formulation of
our credit strategies. Credit risk officers and supporting
teammates within our lines of business are direct participants in
the origination, underwriting, and ongoing management of
credit. They work to promote an appropriate balance between
our risk management and business objectives through adherence
to established policies, procedures, and standards. Credit
Review, one of our independent assurance functions, regularly
assesses and reports on business unit and enterprise asset quality,
and the integrity of our credit processes. Additionally, total
borrower exposure limits and concentration risks are established
and monitored. Credit risk may be mitigated through purchase
of credit loss protection via third party insurance and/or use of
credit derivatives such as CDS.
Borrower/counterparty (obligor) risk and facility risk is
evaluated using our risk rating methodology, which is utilized
in all lines of business. We use various risk models to estimate
both expected and unexpected loss, which incorporates both
internal and external default and loss experience. To the extent
possible, we collect and use internal data to ensure the validity,
reliability, and accuracy of our risk models used in default,
severity, and loss estimation.
Operational Risk Management
We face ongoing and emerging risks and regulations related to
the activities that surround the delivery of banking and financial
products, and we depend on our ability to process, record, and
monitor a large number of client transactions on a continuous
basis. As the potential for operational loss remains elevated and
as client, public, and regulatory expectations regarding
operational and information security have increased, we
continue to enhance our efforts to safeguard and monitor our
operational systems and infrastructure.
Our business activities and operations rely on our systems,
computers, software, data, networks, the internet, and digital
applications, as well as the systems and infrastructure of third
parties. Our business, financial, accounting, data processing, or
other systems and infrastructure may stop operating properly or
become disabled or damaged as a result of a number of factors
and influences that are wholly or partially beyond our control,
such as potential failures, disruptions, and breakdowns, whether
as a result of human error or intentional attack, as well as market
conditions, fraudulent activities, natural disasters, electrical or
telecommunications outages, political or social matters
including terrorist acts, country risk, vendor risk, legal risk,
cyber-attacks, and other security risks. The use of digital
technologies introduces cyber-security risk that can manifest in
55
the form of information theft, criminal acts by individuals,
groups, or nation states, or other disruptions to our Company's,
clients', or third parties' business operations. We use a wide array
of techniques to secure our operations and proprietary
information such as Board approved policies and programs,
network monitoring, access controls, dedicated security
personnel, and defined insurance instruments, as well as consult
with third-party data security experts.
the Board, and our
To control cyber-security risk, we maintain an active
information security program that is designed to conform with
FFIEC guidance. This information security program is aligned
with our operational risks and is overseen by executive
management,
independent audit
function. This program continually monitors and evaluates
threats, events, and the performance of its business operations
and continually adapts and modifies its risk reduction activities
accordingly. We also utilize appropriate cyber-security insurance
that controls against certain losses, expenses, and damages
associated with cyber risk.
Further, we recognize our role in the overall national
payments system, and we have adopted the National Institute of
Standards and Technology's Cyber Security Framework. We also
fully participate in the federally recognized financial sector
information sharing organization structure, known as the
Financial Services Information Sharing and Analysis Center.
Digital technology is constantly evolving, and new and
unforeseen threats and actions by others may disrupt operations
or result in losses beyond our risk control thresholds. Although
we invest substantial time and resources to manage and reduce
cyber risk, it is not possible to completely eliminate this risk.
We believe that effective management of operational risk,
defined as the risk of loss resulting from inadequate or failed
internal processes, people, and systems, or from external events,
plays a major role in both the level and the stability of our
profitability. Our Enterprise Operational Risk Management
function oversees an enterprise-wide framework intended to
identify, assess, control, monitor, and report on operational risks.
These processes support our goals to minimize future operational
losses and strengthen our performance by maintaining sufficient
capital to absorb operational losses that are incurred.
Operational Risk Management is overseen by our EORO.
The operational risk governance structure
includes an
operational risk manager and support staff assigned to each
business segment and corporate function. These risk managers
are responsible for oversight of risk management within their
areas in compliance with ER's policies and procedures.
Market Risk Management
Market risk refers to potential losses arising from changes in
interest rates, foreign exchange rates, equity prices, commodity
prices, and other relevant market rates or prices. Interest rate risk,
defined as the exposure of net interest income and MVE to
changes in interest rates, is our primary market risk and mainly
arises from changes in the structure and composition of our
balance sheet. Variable rate loans, prior to any hedging related
actions, were approximately 58% of total loans at December 31,
2017, and after giving consideration to hedging related actions,
were approximately 48% of total loans. Approximately 5% of
our variable rate loans at December 31, 2017 had coupon rates
that were equal to a contractually specified interest rate floor. In
addition to interest rate risk, we are also exposed to market risk
in our trading instruments measured at fair value. Our ALCO
meets regularly and is responsible for reviewing our ALM and
liquidity risk position in conformance with the established
policies and limits designed to measure, monitor, and control
market risk.
Market Risk from Non-Trading Activities
The primary goal of interest rate risk management is to control
exposure to interest rate risk within policy limits approved by
the Board. These limits reflect our appetite for interest rate risk
over both short-term and long-term horizons. No limit breaches
occurred during the year ended December 31, 2017.
The major sources of our non-trading interest rate risk are
timing differences in the maturity and repricing characteristics
of assets and liabilities, changes in the absolute level and shape
of the yield curve, as well as the embedded optionality in our
products and related customer behavior. We measure these risks
and their impact by identifying and quantifying exposures
through the use of sophisticated simulation and valuation
models, which, as described in additional detail below, are
employed by management to understand net interest income
sensitivity and MVE sensitivity. These measures show that our
interest rate risk profile is modestly asset sensitive at
December 31, 2017.
MVE and net interest income sensitivity are complementary
interest rate risk metrics and should be viewed together. Net
interest income sensitivity captures asset and liability repricing
differences for one year, inclusive of forecast balance sheet
changes, and is considered a shorter term measure. MVE
sensitivity captures the change in the discounted net present
value of all on- and off-balance sheet items and is considered a
longer term measure.
Positive net interest income sensitivity in a rising rate
environment indicates that over the forecast horizon of one year,
asset based interest income will increase more quickly than
liability based
to balance sheet
composition. A negative MVE sensitivity in a rising rate
environment indicates that the value of financial assets will
decrease more than the value of financial liabilities.
interest expense due
One of the primary methods that we use to quantify and
manage interest rate risk is simulation analysis, which we use to
model net interest income from assets, liabilities, and derivative
positions under various interest rate scenarios and balance sheet
structures. This analysis measures the sensitivity of net interest
income over a two-year time horizon, which differs from the
interest rate sensitivities in Table 21, which reflect a one-year
time horizon. Key assumptions in the simulation analysis (and
in the valuation analysis discussed below) relate to the behavior
of interest rates and spreads, the changes in product balances,
and the behavior of loan and deposit clients in different rate
environments. This analysis incorporates several assumptions,
the most significant of which relate to the repricing and
behavioral fluctuations of deposits with indeterminate or non-
contractual maturities.
As the future path of interest rates is not known, we use
simulation analysis to project net interest income under various
56
scenarios including implied forward, deliberately extreme, and
other scenarios that are unlikely. The analyses may include
different scenarios including rapid and gradual ramping of
interest rates, rate shocks, basis risk analysis, and yield curve
twists. Specific strategies are also analyzed to determine their
impact on net interest income levels and sensitivities.
The sensitivity analysis presented in Table 21 is measured
as a percentage change in net interest income due to
instantaneous moves in benchmark interest rates. Estimated
changes below are dependent upon material assumptions such
as those previously discussed.
Net Interest Income Asset Sensitivity
Table 21
Estimated % Change in
Net Interest Income Over 12 Months 1
December 31, 2017
December 31, 2016
Rate Change
2.4%
+200 bps
1.4%
+100 bps
(1.0)%
-50 bps
1 Estimated % change of net interest income is reflected on a non-FTE basis.
3.3%
1.9%
(2.7)%
Net interest income asset sensitivity at December 31, 2017
decreased compared to December 31, 2016, driven primarily by
growth in fixed rate consumer loans and a decrease in floating
rate commercial loans. See additional discussion related to net
interest income in the "Net Interest Income/Margin" section of
this MD&A.
We also perform valuation analyses, which we use for
discerning levels of risk present in the balance sheet and
derivative positions that might not be taken into account in the
net interest income simulation horizon. Whereas a net interest
income simulation highlights exposures over a relatively short
time horizon, our valuation analysis incorporates all cash flows
over the estimated remaining life of all balance sheet and
derivative positions.
The valuation of the balance sheet, at a point in time, is
defined as the discounted present value of asset and derivative
cash flows minus the discounted present value of liability cash
flows, the net of which is referred to as MVE. The sensitivity of
MVE to changes in the level of interest rates is a measure of the
longer-term repricing risk and embedded optionality in the
balance sheet. Similar to the net interest income simulation,
MVE uses instantaneous changes in rates. However, MVE values
only the current balance sheet and does not incorporate
originations of new/replacement business or balance sheet
growth that are used in the net interest income simulation model.
As with the net interest income simulation model, assumptions
about the timing and variability of balance sheet cash flows are
critical in the MVE analysis. Significant MVE assumptions
include those that drive prepayment speeds, expected changes
in balances, and pricing of the indeterminate deposit portfolios.
At December 31, 2017, the MVE profile in Table 22
indicates a decline in net balance sheet value due to instantaneous
upward changes in rates. This MVE sensitivity is reported for
both upward and downward rate shocks.
Market Value of Equity Sensitivity
Table 22
Estimated % Change in MVE
December 31, 2017
December 31, 2016
Rate Change
+200 bps
+100 bps
-50 bps
(7.6)%
(3.3)%
0.8%
(9.1)%
(4.2)%
1.5%
The decrease in MVE sensitivity at December 31, 2017
compared to December 31, 2016 was due to lower balance sheet
duration, driven primarily by a decline in our outstanding active
notional balance of receive-fixed, pay-variable commercial loan
swaps, as well as tighter spreads on loans. While an instantaneous
and severe shift in interest rates was used in this analysis to
provide an estimate of exposure under these rate scenarios, we
believe that a gradual shift in interest rates would have a much
more modest impact.
Since MVE measures the discounted present value of cash
flows over the estimated lives of instruments, the change in MVE
does not directly correlate to the degree that earnings would be
impacted over a shorter time horizon (i.e., the current year).
Furthermore, MVE does not take into account factors such as
future balance sheet growth, changes in product mix, changes in
yield curve relationships, and changing product spreads that
could mitigate the impact of changes in interest rates. The net
interest income simulation and valuation analyses do not include
actions that management may undertake to manage this risk in
response to anticipated changes in interest rates.
Market Risk from Trading Activities
We manage market risk associated with trading activities using
a comprehensive risk management approach, which includes
VAR metrics, stress testing, and sensitivity analyses. Risk
metrics are measured and monitored on a daily basis at both the
trading desk and at the aggregate portfolio level to ensure
exposures are in line with our risk appetite. Our risk measurement
for covered positions subject to the Market Risk Rule takes into
account trading exposures resulting from interest rate risk, equity
risk, foreign exchange rate risk, credit spread risk, and
commodity price risk.
For trading portfolios, VAR measures the estimated
maximum loss from one or more trading positions, given a
specified confidence level and time horizon. VAR results are
monitored daily against established limits. For risk management
purposes, our VAR calculation is based on a historical simulation
and measures the potential trading losses using a one-day holding
period at a one-tail, 99% confidence level. This means that, on
average, trading losses could exceed VAR one out of 100 trading
days or two to three times per year. Due to inherent limitations
of the VAR methodology, such as the assumption that past market
behavior is indicative of future market performance, VAR is only
one of several tools used to manage market risk. Other tools used
to actively manage market risk include scenario analysis, stress
testing, profit and loss attribution, and stop loss limits.
57
In addition to VAR, as required by the Market Risk Rule
issued by the U.S. banking regulators, we calculate Stressed
VAR, which is used as a component of the total market risk capital
charge. We calculate the Stressed VAR risk measure using a ten-
day holding period at a one-tail, 99% confidence level and
employ a historical simulation approach based on a continuous
twelve-month historical window selected to reflect a period of
significant financial stress for our trading portfolio. The
historical period used in the selection of the stress window
encompasses all recent financial crises. Our Stressed VAR
calculation uses the same methodology and models as regular
VAR, which is a requirement under the Market Risk Rule. Table
23 presents VAR and Stressed VAR for the year ended December
31, 2017 and 2016, as well as VAR by Risk Factor at
December 31, 2017 and 2016.
Value at Risk Profile
Table 23
Year Ended December 31
2017
2016
(Dollars in millions)
VAR (1-day holding period):
Period end
High
Low
Average
Stressed VAR (10-day holding period):
Period end
High
Low
Average
VAR by Risk Factor at period end (1-day holding period):
Equity risk
Interest rate risk
Credit spread risk
VAR total at period end (1-day diversified)
$1
2
3
2
trading portfolio, measured
is
The
predominantly comprised of four sub-portfolios of covered
positions: (i) credit trading, (ii) fixed income securities, (iii)
interest rate derivatives, and (iv) equity derivatives. The trading
portfolio also contains other sub-portfolios, including foreign
terms of VAR,
in
$2
3
1
2
$52
110
22
54
$3
4
1
3
$37
118
8
37
$1
2
5
3
exchange rate and commodity derivatives; however, these
trading risk exposures are not material. Our covered positions
originate primarily from underwriting, market making and
associated risk mitigating hedging activity, and other services
for our clients. The trading portfolio's VAR profile, as illustrated
in Table 23, is influenced by a variety of factors, including the
size and composition of the portfolio, market volatility, and the
correlation between different positions. Average daily VAR as
well as period end VAR decreased for the year ended December
31, 2017 compared to the same period in 2016. These decreases
were driven primarily by lower levels of market volatility during
2017, offset partially by the impact of higher balance sheet usage
in our credit trading portfolio as a result of favorable market
conditions and strong client demand. Average Stressed VAR as
well as period end Stressed VAR, which are not influenced by
current levels of market volatility, increased for the year ended
December 31, 2017 compared to the same period in 2016. These
increases were driven by the aforementioned increase in balance
sheet usage in our credit trading portfolio, as well as higher
stressed exposures associated with our equity derivatives
portfolio. Nonetheless, our Stressed VAR remains within
historical ranges. The trading portfolio of covered positions did
not contain any correlation trading positions or on- or off-balance
sheet securitization positions during the year ended December
31, 2017 or 2016.
In accordance with the Market Risk Rule, we evaluate the
accuracy of our VAR model through daily backtesting by
comparing aggregate daily trading gains and losses (excluding
fees, commissions, reserves, net interest income, and intraday
trading) from covered positions with the corresponding daily
VAR-based measures generated by the model. As illustrated in
the following graph for the twelve months ended December 31,
2017, there were no firmwide VAR backtesting exceptions
during this period. The total number of VAR backtesting
exceptions over the preceding twelve months is used to
determine the multiplication factor for the VAR-based capital
requirement under
the Market Risk Rule. The capital
multiplication factor increases from a minimum of three to a
maximum of four, depending on the number of exceptions. There
was no change in the capital multiplication factor over the
preceding twelve months.
58
We have valuation policies, procedures, and methodologies for
all covered positions. Additionally, trading positions are reported
in accordance with U.S. GAAP and are subject to independent
price verification. See Note 17, "Derivative Financial
Instruments" and Note 18, "Fair Value Election and
Measurement" to the Consolidated Financial Statements in this
Form 10-K, as well as the "Critical Accounting Policies" MD&A
section of this Form 10-K for discussion of valuation policies,
procedures, and methodologies.
Model risk management: Our approach regarding the validation
and evaluation of the accuracy of our internal models, external
models, and associated processes, includes developmental and
implementation testing as well as ongoing monitoring and
maintenance performed by the various model developers, in
conjunction with model owners. Our MRMG is responsible for
the independent model validation of all trading risk models. The
includes evaluation of all model
validation
documentation as well as model monitoring and maintenance
plans. In addition, the MRMG performs its own independent
testing. We regularly review the performance of all trading risk
models through our model monitoring and maintenance process
to preemptively address emerging developments in financial
markets, assess evolving modeling approaches, and to identify
potential model enhancement.
typically
Stress testing: We use a comprehensive range of stress testing
techniques to help monitor risks across trading desks and to
augment standard daily VAR and other risk limits reporting. The
stress testing framework is designed to quantify the impact of
extreme, but plausible, stress scenarios that could lead to large
unexpected losses. Our stress tests include historical repeats and
simulations using hypothetical risk factor shocks. All trading
positions within each applicable market risk category (interest
rate risk, equity risk, foreign exchange rate risk, credit spread
risk, and commodity price risk) are
in our
comprehensive stress testing framework. We review stress
testing scenarios on an ongoing basis and make updates as
necessary to ensure that both current and emerging risks are
captured appropriately.
included
Trading portfolio capital adequacy: We assess capital adequacy
on a regular basis, which is based on estimates of our risk profile
and capital positions under baseline and stressed scenarios.
Scenarios consider significant risks, including credit risk, market
risk, and operational risk. Our assessment of capital adequacy
arising from market risk includes a review of risk arising from
material portfolios of covered positions. See the “Capital
Resources” section in this MD&A for additional discussion of
capital adequacy.
Liquidity Risk Management
Liquidity risk is the risk of being unable, at a reasonable cost, to
meet financial obligations as they come due. We manage
liquidity risk consistent with our ER management practices in
order to mitigate our three primary liquidity risks: (i) structural
liquidity risk, (ii) market liquidity risk, and (iii) contingency
liquidity risk. Structural liquidity risk arises from our maturity
transformation activities and balance sheet structure, which may
create differences in the timing of cash inflows and outflows.
Market liquidity risk, which we also describe as refinancing or
refunding risk, constitutes the risk that we could lose access to
the financial markets or the cost of such access may rise to
undesirable levels. Contingency liquidity risk arises from rare
59
and severely adverse liquidity events; these events may be
idiosyncratic or systemic, or a combination thereof.
is consistent with applicable policies, procedures, laws, and
regulations.
We mitigate these risks utilizing a variety of tested liquidity
management techniques in keeping with regulatory guidance and
industry best practices. For example, we mitigate structural
liquidity risk by structuring our balance sheet prudently so that
we fund less liquid assets, such as loans, with stable funding
sources, such as consumer and commercial deposits, long-term
debt, and capital. We mitigate market liquidity risk by
maintaining diverse borrowing resources to fund projected cash
needs and structuring our
to avoid maturity
concentrations. We test contingency liquidity risk from a range
of potential adverse circumstances in our contingency funding
scenarios. These scenarios inform the amount of contingency
liquidity sources we maintain as a liquidity buffer to ensure we
can meet our obligations in a timely manner under adverse
contingency liquidity events.
liabilities
Governance. We maintain a comprehensive liquidity risk
governance structure in keeping with regulatory guidance and
industry best practices. Our Board, through the BRC, oversees
liquidity risk management and establishes our liquidity risk
appetite via a set of cascading risk limits. The BRC reviews and
approves risk policies to establish these limits and regularly
reviews reports prepared by senior management to monitor
compliance with these policies. The Board charges the CEO with
determining corporate strategies in accordance with its risk
appetite and the CEO is a member of our ALCO, which is the
executive level committee with oversight of liquidity risk
management. The ALCO regularly monitors our liquidity and
compliance with liquidity risk limits, and also reviews and
approves liquidity management strategies and tactics.
Management and Reporting Framework. Corporate Treasury,
under the oversight of the ALCO, is responsible for managing
consolidated liquidity risks we encounter in the course of our
business. In so doing, Corporate Treasury develops and
implements short-term and long-term liquidity management
strategies, funding plans, and liquidity stress tests, and also
monitors early warning indicators; all of which assist in
identifying, measuring, monitoring, reporting, and managing our
liquidity risks. Corporate Treasury primarily monitors and
manages liquidity risk at the Parent Company and Bank levels
as the non-bank subsidiaries are relatively small and ultimately
rely upon the Parent Company as a source of liquidity in adverse
environments. However, Corporate Treasury also monitors
liquidity developments of, and maintains a regular dialogue with,
our other legal entities.
MRM conducts independent oversight and governance of
liquidity risk management activities. For example, MRM works
with Corporate Treasury to ensure our liquidity risk management
practices conform to applicable laws and regulations and
evaluates key assumptions incorporated in our contingency
funding scenarios.
Further, the internal audit function performs the risk
assurance role for liquidity risk management. Internal audit
conducts an independent assessment of the adequacy of internal
controls,
including procedural documentation, approval
processes, reconciliations, and other mechanisms employed by
liquidity risk management and MRM to ensure that liquidity risk
LCR requirements under Regulation WW require large U.S.
banking organizations to hold unencumbered high-quality liquid
assets sufficient to withstand projected 30-day total net cash
outflows, each as defined under the LCR rule. At December 31,
2017, our LCR calculated pursuant to the rule was above the
100% minimum regulatory requirement.
On December 19, 2016, the FRB published a final rule
implementing public disclosure requirements for BHCs subject
to the LCR that will require them to publicly disclose quantitative
and qualitative information regarding their respective LCR
calculations on a quarterly basis. We will be required to begin
disclosing elements under this final rule after October 1, 2018.
On May 3, 2016, the FRB, OCC, and the FDIC issued a joint
proposed rule to implement the NSFR. The proposal would
require large U.S. banking organizations to maintain a stable
funding profile over a one-year horizon. The FRB proposed a
modified NSFR requirement for BHCs with greater than $50
billion but less than $250 billion in total consolidated assets, and
less than $10 billion in total on balance sheet foreign exposure.
The proposed NSFR requirement seeks
to (i) reduce
vulnerability to liquidity risk in financial institution funding
structures and (ii) promote improved standardization in the
measurement, management and disclosure of liquidity risk. The
proposed rule contains an implementation date of January 1,
2018; however, a final rule has not yet been issued.
Uses of Funds. Our primary uses of funds include the extension
of loans and credit, the purchase of investment securities,
working capital, and debt and capital service. The Bank borrows
from the money markets using instruments such as Fed Funds,
Eurodollars, and securities sold under agreements to repurchase.
At December 31, 2017, the Bank retained a material cash
position in its Federal Reserve account. The Parent Company
also retained material cash position in its account with the Bank
in accordance with our policies and risk limits, discussed in
greater detail below.
Sources of Funds. Our primary source of funds is a large, stable
deposit base. Core deposits, predominantly made up of consumer
and commercial deposits originated primarily from our retail
branch network and Wholesale client base, are our largest and
most cost-effective source of funding. Total deposits increased
to $160.8 billion at December 31, 2017, from $160.4 billion at
December 31, 2016.
We also maintain access to diversified sources for both
secured and unsecured wholesale funding. These uncommitted
sources include Fed Funds purchased from other banks,
securities sold under agreements to repurchase, FHLB advances,
and Global Bank Notes. Aggregate borrowings decreased to
$14.6 billion at December 31, 2017, from $16.5 billion at
December 31, 2016.
As mentioned above, the Bank and Parent Company
maintain programs to access the debt capital markets. The Parent
Company maintains an SEC shelf registration from which it may
issue senior or subordinated notes and various capital securities,
such as common or preferred stock. Our Board has authorized
the issuance of up to $5.0 billion of such securities under the
SEC shelf registration, of which $1.7 billion and $3.0 billion of
60
issuance capacity remained available at December 31, 2017 and
December 31, 2016, respectively. The reduction in our SEC shelf
registration issuance capacity during the year ended December
31, 2017 was driven by the Parent Company's May 2017 issuance
of $750 million of Perpetual Preferred Stock, Series G and
November 2017 issuance of $500 million of Perpetual Preferred
Stock, Series H. See the "Capital Resources" section of this
MD&A for additional information regarding our stock issuances.
The Bank maintains a Global Bank Note program under
which it may issue senior or subordinated debt with various
terms. In January 2017, the Bank issued $1.0 billion of 3-year
fixed rate senior notes and $300 million of 3-year floating rate
senior notes under this program. In July 2017, we issued $1.0
billion of 5-year senior notes that pay a fixed annual coupon rate
of 2.45% under our Global Bank Note program. At December 31,
2017, the Bank retained $35.1 billion of remaining capacity to
issue notes under the Global Bank Note program. See the “Recent
Developments” section below for a description of issuances
subsequent to December 31, 2017 under this program.
Our issuance capacity under these Bank and Parent
Company programs refers to authorization granted by our Board,
which is a formal program capacity and not a commitment to
purchase by any investor. Debt and equity securities issued under
these programs are designed to appeal primarily to domestic and
investor
international
demand for these securities depends upon numerous factors,
including, but not limited to, our credit ratings, investor
perception of financial market conditions, and the health of the
banking sector. Therefore, our ability to access these markets in
the future could be impaired for either idiosyncratic or systemic
reasons.
investors. Institutional
institutional
We assess liquidity needs that may occur in both the normal
course of business and during times of unusual, adverse events,
considering both on and off-balance sheet arrangements and
commitments that may impact liquidity in certain business
environments. We have contingency funding scenarios and plans
that assess liquidity needs that may arise from certain stress
events such as severe economic recessions, financial market
disruptions, and credit rating downgrades. In particular, a ratings
downgrade could adversely impact the cost and availability of
some of our liquid funding sources. Factors that affect our credit
ratings include, but are not limited to, the credit risk profile of
our assets, the adequacy of our ALLL, the level and stability of
our earnings, the liquidity profile of both the Bank and the Parent
Company, the economic environment, and the adequacy of our
capital base.
As illustrated in Table 24, S&P assigned a “Positive” outlook
on our credit rating, while both Moody’s and Fitch maintained
“Stable” outlooks. Future credit rating downgrades are possible,
although not currently anticipated given these “Positive” and
“Stable” credit rating outlooks.
Credit Ratings and Outlook
Table 24
December 31, 2017
Moody’s
S&P
Fitch
SunTrust Banks, Inc.:
Senior debt
Preferred stock
SunTrust Bank:
Long-term deposits
Short-term deposits
Senior debt
Outlook
Baa1
Baa3
BBB+
BB+
A1
P-1
Baal
Stable
A-
A-2
A-
Positive
Stable
A-
BB
A
F1
A-
Our investment portfolio is a use of funds and we manage the
portfolio primarily as a store of liquidity, maintaining the
majority of our securities in liquid and high-grade asset classes,
such as agency MBS, agency debt, and U.S. Treasury securities;
nearly all of these securities qualify as high-quality liquid assets
under the U.S. LCR Final Rule. At December 31, 2017, our
securities AFS portfolio contained $26.8 billion of
unencumbered high-quality, liquid securities at market value.
As mentioned above, we evaluate contingency funding
scenarios to anticipate and manage the likely impact of impaired
capital markets access and other adverse liquidity circumstances.
Our contingency plans also provide for continuous monitoring
of net borrowed funds dependence and available sources of
contingency liquidity. These contingency liquidity sources
include available cash reserves, the ability to sell, pledge, or
borrow against unencumbered securities in our investment
portfolio, the capacity to borrow from the FHLB system or the
Federal Reserve discount window, and the ability to sell or
securitize certain loan portfolios. Table 25 presents period end
and average balances of our contingency liquidity sources for
2017 and 2016. These sources exceed our contingency liquidity
needs as measured in our contingency funding scenarios.
Contingency Liquidity Sources
Table 25
(Dollars in billions)
Excess reserves
Free and liquid investment portfolio securities
Unused FHLB borrowing capacity
Unused discount window borrowing capacity
Total
As of
Average for the Year Ended ¹
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
$2.6
26.8
23.8
18.2
$71.4
$2.5
27.6
21.8
17.0
$68.9
$2.9
27.4
22.2
17.6
$70.1
$2.9
24.8
22.1
17.2
$67.0
1 Average based upon month-end data, except excess reserves, which is based upon a daily average.
61
Parent Company Liquidity. Our primary measure of Parent
Company liquidity is the length of time the Parent Company can
meet its existing and forecasted obligations using its cash
resources. We measure and manage this metric using forecasts
from both normal and adverse conditions. Under adverse
conditions, we measure how long the Parent Company can meet
its capital and debt service obligations after experiencing
material attrition of short-term unsecured funding and without
the support of dividends from the Bank or access to the capital
markets. In accordance with these risk limits established by
ALCO and the Board, we manage the Parent Company’s
liquidity by structuring its net maturity schedule to minimize the
amount of debt maturing within a short period of time. A majority
of the Parent Company’s liabilities are long-term in nature,
coming from the proceeds of issuances of our capital securities
and
the
long-term senior and subordinated notes. See
“Borrowings” section of this MD&A, as well as Note 11,
“Borrowings and Contractual Commitments,”
the
Consolidated Financial Statements in this Form 10-K for further
information regarding our debt.
to
We manage the Parent Company to maintain most of its
liquid assets in cash and securities that it can quickly convert
into cash. Unlike the Bank, it is not typical for the Parent
Company to maintain a material investment portfolio of publicly
traded securities. We manage the Parent Company cash balance
to provide sufficient liquidity to fund all forecasted obligations
(primarily debt and capital service) for an extended period of
months in accordance with our risk limits.
The primary uses of Parent Company liquidity include debt
service, dividends on capital instruments, the periodic purchase
of investment securities, loans to our subsidiaries, and common
share repurchases. See further details of the authorized common
share repurchases in the “Capital Resources” section of this
MD&A and in Part II, Item 2, “Unregistered Sales of Equity
Securities and Use of Proceeds” in this Form 10-K. We fund
corporate dividends with Parent Company cash, the primary
sources of which are dividends from our banking subsidiary and
proceeds from the issuance of debt and capital securities. We are
subject to both state and federal banking regulations that limit
our ability to pay common stock dividends in certain
circumstances.
Recent Developments. In the first quarter of 2018, we issued $500
million of 5-year senior notes that pay a fixed annual coupon
rate of 3.00% under our Global Bank Note program. We may
call these notes beginning on August 2, 2018 under a "make-
whole" provision, and they mature on February 2, 2023. Also in
the first quarter of 2018, we issued $750 million of 3-year fixed-
to-floating rate senior notes under our Global Bank Note
program. The notes pay a fixed annual coupon rate of 2.59%
until January 29, 2020 and pay a floating coupon rate of 3-month
LIBOR plus 29.75 basis points thereafter. We may call these
notes beginning on January 29, 2020, and they mature on January
29, 2021. These issuances allowed us to supplement our funding
sources at favorable borrowing rates and pay down maturing
borrowings.
Other Liquidity Considerations. As presented in Table 26, we
had an aggregate potential obligation of $87.4 billion to our
clients in unused lines of credit at December 31, 2017.
Commitments to extend credit are arrangements to lend to clients
who have complied with predetermined contractual obligations.
We also had $2.6 billion in letters of credit outstanding at
December 31, 2017, most of which are standby letters of credit,
which require that we provide funding if certain future events
occur. Approximately $238 million of these letters supported
variable rate demand obligations at December 31, 2017. Unused
commercial lines of credit decreased slightly since December 31,
2016, driven by revolver utilization. Residential mortgage
commitments also decreased since December 31, 2016, due
primarily to reduced IRLC volume during the year ended
December 31, 2017. Additionally, unused CRE lines of credit
decreased modestly since December 31, 2016, driven primarily
by increased utilization of existing CRE lines of credit.
Unfunded Lending Commitments
(Dollars in millions)
Unused lines of credit:
Commercial
Residential mortgage commitments 1
Home equity lines
CRE 2
Credit card
Total unused lines of credit
Letters of credit:
Financial standby
Performance standby
Commercial
Total letters of credit
As of
Average for the Three Months Ended
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Table 26
$59,625
3,036
10,086
4,139
10,533
$87,419
$2,453
125
14
$2,592
$59,803
4,240
10,336
4,468
9,798
$88,645
$2,777
130
19
$2,926
$59,120
3,556
10,101
3,963
10,488
$87,228
$2,633
121
16
$2,770
$58,865
5,864
10,353
4,386
9,726
$89,194
$2,716
131
19
$2,866
1 Includes residential mortgage IRLCs with notional balances of $1.7 billion and $2.6 billion at December 31, 2017 and 2016, respectively.
2 Includes commercial mortgage IRLCs and other commitments with notional balances of $240 million and $395 million at December 31, 2017 and 2016, respectively.
62
Other Market Risk
Other sources of market risk include the risk associated with
holding loans, securities designated for sale, and mortgage loan
commitments, as well as the risk associated with our investment
in servicing rights. We manage the risks associated with
mortgage LHFS and our IRLCs on mortgage loans intended for
sale. The mortgage LHFS and IRLCs consist of fixed and
adjustable rate residential and commercial mortgage loans. The
risk associated with mortgage LHFS and IRLCs is the potential
change in interest rates between the time the customer locks the
rate on the anticipated loan and the time the loan is sold, which
is typically 30-150 days.
We manage interest rate risk predominantly with interest
rate swaps, futures, and forward sale agreements, where the
changes in value of the instruments substantially offset the
changes in value of mortgage LHFS and IRLCs. IRLCs on
mortgage loans intended for sale are classified as derivative
instruments and are not designated for hedge accounting
purposes.
All servicing rights are initially measured at the present
value of future net cash flows that are expected to be received
from the associated servicing portfolio. The initial value of
servicing rights is highly dependent upon the assumed
prepayment speed of the servicing portfolio, which is driven by
the level of certain key interest rates, primarily the current 30-
year mortgage rate. Future expected net cash flows from
servicing a loan in the servicing portfolio would not be realized
if the loan pays off earlier than anticipated.
We measure our residential MSRs at fair value on a recurring
basis and hedge the risk associated with changes in fair value.
Residential MSRs totaled $1.7 billion and $1.6 billion at
December 31, 2017 and 2016, respectively, and are managed and
monitored as part of a comprehensive risk governance process,
which includes established risk limits.
We originated residential MSRs with fair values at the time
of origination of $394 million and $312 million during 2017 and
2016, respectively. Additionally, we purchased residential MSRs
with a fair value of approximately $200 million during the year
ended December 31, 2016. No residential MSRs were purchased
during the year ended December 31, 2017.
We recognized mark-to-market decreases in the fair value
of residential MSRs of $248 million and $245 million during
2017 and 2016, respectively. Changes in fair value include the
UPB decay resulting from the realization of monthly net
servicing cash flows as well as credit decay resulting from shifts
in the underlying loans delinquency status. We recognized net
losses related to residential MSRs, inclusive of fair value changes
and related hedges, of $212 million and $175 million during 2017
and 2016, respectively. Compared to the prior year, the increase
in net losses related to residential MSRs was primarily driven
by higher decay combined with a decrease in net hedge
performance in the current periods. All other servicing rights,
which include commercial mortgage and consumer indirect loan
servicing rights, are not measured at fair value on a recurring
basis, and therefore, are not subject to the same market risks
associated with residential MSRs.
We held a total net book value of approximately $22 million
and $21 million of non-public equity exposures (direct
investments) and other equity-related
investments at
December 31, 2017 and 2016, respectively. We generally hold
these investments as long-term investments. If conditions in the
market deteriorate, these long-term investments and other assets
could incur impairment charges.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business we engage in certain activities
that are not reflected in our Consolidated Balance Sheets,
generally referred to as "off-balance sheet arrangements." These
activities involve transactions with unconsolidated VIEs as well
as other arrangements, such as commitments and guarantees, to
meet the financing needs of our clients and to support ongoing
operations. Additional information regarding these types of
activities is included in the "Liquidity Risk Management" section
of this MD&A, as well as in Note 10, "Certain Transfers of
Financial Assets and Variable Interest Entities," Note 11,
"Borrowings and Contractual Commitments," and Note 16,
"Guarantees," to the Consolidated Financial Statements in this
Form 10-K.
and
investments,
Contractual Obligations
In the normal course of business, we enter into certain contractual
obligations, including obligations to make future payments on
our borrowings, partnership
lease
arrangements, as well as commitments to lend to clients and to
fund capital expenditures and service contracts. Table 27
presents our significant contractual obligations at December 31,
2017, except for UTBs (discussed below), short-term
borrowings (presented in the "Borrowings" section of this
MD&A), and pension and other postretirement benefit plans,
disclosed in Note 15, "Employee Benefit Plans," to the
Consolidated Financial Statements in this Form 10-K. For
additional
lending
information regarding our unfunded
commitments, time deposits, operating leases, and long-term
debt, refer to the "Liquidity Risk Management" and "Deposits"
sections of this MD&A, as well as Note 8, "Premises and
Equipment," and Note 11, "Borrowings and Contractual
Commitments," to the Consolidated Financial Statements in this
Form 10-K.
At December 31, 2017, we had UTBs of $141 million, which
represent a reserve for tax positions that we have taken or expect
to be taken in our tax returns, and which ultimately may not be
sustained upon examination by taxing authorities. Since the
ultimate amount and timing of any future tax settlements are
uncertain, UTBs have been excluded from Table 27. See
additional discussion in Note 14, "Income Taxes," to the
Consolidated Financial Statements in this Form 10-K.
63
(Dollars in millions)
Contractual Obligations:
Unfunded lending commitments
Consumer and other time deposits 1
Brokered time deposits 1
Long-term debt 1, 2
Operating leases
Purchase obligations 3
Commitments to fund partnership investments 4
Total
Less than 1
year
$25,265
4,720
105
1,235
205
278
690
$32,498
Payments Due by Period at December 31, 2017
More than 5
years
3-5 years
1-3 years
$23,421
3,890
432
2,327
378
336
—
$30,784
$29,259
1,451
372
2,981
318
98
—
$34,479
$12,066
2,015
76
3,258
657
247
—
$18,319
Table 27
Total
$90,011
12,076
985
9,801
1,558
959
690
$116,080
1 Amounts do not include interest.
2 Amounts do not include deduction of related debt issuance costs of $16 million.
3 For legally binding purchase obligations of $5 million or more, amounts include either termination fees under the associated contracts when early termination
provisions exist, or the total potential obligation over the full contractual term for noncancelable purchase obligations. Payments made towards the purchase of
goods or services under these contracts totaled $395 million in 2017.
4 Commitments to fund investments in affordable housing and other partnerships do not have defined funding dates as certain criteria must be met before we are
obligated to fund. Accordingly, these commitments are considered to be due on demand for presentation purposes. See Note 10, "Certain Transfers of Financial
Assets and Variable Interest Entities," to the Consolidated Financial Statements in this Form 10-K for additional information.
BUSINESS SEGMENTS
See Note 20, "Business Segment Reporting," to the Consolidated
Financial Statements in this Form 10-K for a description of our
business segments, basis of presentation, internal management
reporting methodologies, and business segment structure
realignment from three segments to two segments in the second
quarter of 2017. Table 28 presents net income for our reportable
business segments:
Net Income by Business Segment
Table 28
(Dollars in millions)
Consumer
Wholesale
Corporate Other
Reconciling Items 1
Total Corporate Other
Consolidated Net Income
Year Ended December 31
2016
2017
2015
$871
1,373
199
(170)
29
$2,273
$965
979
160
(226)
(66)
$1,878
$1,081
1,053
184
(385)
(201)
$1,933
1 Reflects differences between net income reported for each business segment using management accounting practices and U.S. GAAP. Prior period information has
been restated to reflect changes in internal reporting methodology. See additional information in Note 20, "Business Segment Reporting," to the Consolidated
Financial Statements in this Form 10-K.
Table 29 presents average LHFI and average deposits for our reportable business segments for the years ended December 31:
Average LHFI and Deposits by Business Segment
(Dollars in millions)
Consumer
Wholesale
Corporate Other
2017
$72,622
71,521
73
Average LHFI
2016
$69,455
71,600
63
2015
$65,637
67,872
49
Table 29
Average Consumer
and Commercial Deposits
2016
$99,424
54,713
52
2017
$102,820
56,618
111
2015
$93,789
50,373
41
64
BUSINESS SEGMENT RESULTS
Year Ended December 31, 2017 versus 2016
Consumer
Consumer reported net income of $871 million for the year ended
December 31, 2017, a decrease of $94 million, or 10%, compared
2016. The decrease was driven primarily by higher provision for
credit losses and lower noninterest income, offset partially by
higher net interest income.
Net interest income was $3.7 billion, an increase of $233
million, or 7%, compared to 2016, driven by growth in average
LHFI and deposit balances as well as improved deposit spreads.
Net interest income related to deposits increased $201 million,
or 10%, driven by a 13 basis point increase in deposit spread and
a $3.4 billion, or 3%, increase in average deposit balances. Net
interest income related to LHFI increased $55 million, or 4%,
driven primarily by growth in average LHFI balances.
Provision for credit losses was $368 million, an increase of
$196 million compared to 2016, driven by lower ALLL release
in 2017. Net charge-offs increased by $12 million in response to
higher loan balances.
Total noninterest income was $1.9 billion, a decrease of
$162 million, or 8%, compared to 2016. The decrease was driven
primarily by lower mortgage-related income associated with
reduced refinancing activity and lower service charges on
deposits due to the enhanced posting order process instituted
during the fourth quarter of 2016.
Total noninterest expense was $3.8 billion, an increase of
$46 million, or 1%, compared to 2016. The increase was due to
increased expenses associated with corporate support and
technology, occupancy and branch network-related activities,
and marketing investments, offset partially by lower staff
expense, lower outside processing costs, and accrual reversals
related to the favorable resolution of previous legal matters.
Wholesale
Wholesale reported net income of $1.4 billion for the year ended
December 31, 2017, an increase of $394 million, or 40%,
compared to 2016. The increase was due to higher net interest
income, noninterest income, and lower provision for credit
losses, offset partially by higher noninterest expense.
Net interest income was $2.4 billion, an increase of $235
million, or 11%, compared to 2016, driven primarily by higher
deposit balances and improved spreads on both loans and
deposits. Net interest income related to deposits increased $157
million, or 20%, as a result of higher benchmark interest rates
and higher average deposits. Average deposit balances increased
by $1.9 billion, or 3%, as a result of a $3.3 billion increase in
interest-bearing transaction accounts and a $700 million increase
in CDs, offset largely by a $1.3 billion decrease in money market
accounts and a $763 million decrease in noninterest-bearing
DDAs. Although average LHFI was relatively flat, net interest
income related to LHFI increased $51 million, or 4%, as a result
of improved loan spreads.
Provision for credit losses was $41 million, a decrease of
$231 million, or 85%, compared to 2016. The decrease was due
primarily to lower nonperforming loans and lower energy-
related net charge-offs.
65
Total noninterest income was $1.7 billion, an increase of
$354 million, or 26%, compared to 2016. The increase was
driven primarily by higher investment banking income, which
increased $105 million, or 21%, the $107 million gain on sale
of PAC (see Table 1 for a summary of Form 8-K and tax reform-
related items), and $70 million of fee income from Pillar with
the remainder of the increase attributable to higher tax credits
and other loan related fees. These increases were offset partially
by declines in trading income and structured real estate gains.
to
Total noninterest expense was $1.9 billion, an increase of
$193 million, or 12%, compared to 2016. The increase was due
the Pillar acquisition, higher employee
primarily
compensation costs attributable
improved business
to
performance and ongoing investment in technology, as well as
higher amortization expense associated with STCC tax credit
investments, partially offset by lower operating losses.
Corporate Other
Corporate Other net income was $199 million for the year ended
December 31, 2017, an increase of $39 million, or 24%,
compared to 2016. The increase in net income was due primarily
to lower provision for income taxes in 2017 as a result of Form
8-K and tax reform-related items.
Net interest income was a net expense of $41 million, a
decrease of $144 million compared to 2016. The decrease was
driven by lower commercial loan-related swap income due to
higher LIBOR rates. Average long-term debt increased $154
million, or 2%, compared to 2016, driven by balance sheet
management activities.
Total noninterest income was a net expense of $33 million,
a decrease of $171 million compared to 2016. The decrease was
due to the $109 million securities AFS portfolio restructuring
loss (see Table 1 for a summary of Form 8-K and tax reform-
related items) and a gain on the sale-leaseback of one of our
office buildings in the second quarter of 2016.
Total noninterest expense was $73 million, an increase of
$60 million compared to 2016. The increase was due primarily
to higher severance costs in 2017.
Year Ended December 31, 2016 versus 2015
Consumer
Consumer reported net income of $965 million for the year ended
December 31, 2016, a decrease of $116 million, or 11%,
compared 2015. The decrease was driven primarily by higher
provision for credit losses and higher noninterest expense, offset
partially by higher net interest income and higher noninterest
income.
Net interest income was $3.5 billion, an increase of $140
million, or 4%, compared to 2015, driven by growth in average
loan and deposit balances and favorable deposit mix, offset
partially by lower loan and deposit spreads. Net interest income
related to deposits increased $94 million, or 5%, driven by a $5.6
billion, or 6%, increase in average deposit balances. Net interest
income related to LHFI increased $30 million, or 2%, driven by
a $3.8 billion, or 6%, increase in average LHFI. Average LHFI
growth was driven by residential mortgages, other direct,
guaranteed student, indirect, and credit card loans, offset
partially by declines in home equity products.
Provision for credit losses was $172 million, an increase of
$145 million compared to 2015. The increase was driven by loan
growth and lower ALLL release in 2016.
Total noninterest income was $2.0 billion, an increase of
$69 million, or 4%, compared to 2015. The increase was driven
by higher mortgage-related income. Mortgage production
related income increased $96 million compared to 2015, due to
higher production volume and higher gain on sale margins.
Mortgage servicing related income increased $19 million, or
12%, driven primarily by higher servicing fees and favorable net
hedge performance, offset partially by higher decay expense.
Service charges on deposit accounts, card and ATM fee income
also increased, offset by declines in wealth management-related
income of $49 million, or 8%, due to lower transactional volumes
and certain asset impairment charges recognized in 2016.
Total noninterest expense was $3.8 billion, an increase of
$165 million, or 5%, compared to 2015. The increase was driven
by higher corporate support costs, operating losses, and
marketing investments.
Wholesale
Wholesale reported net income of $979 million for the year ended
December 31, 2016, a decrease of $74 million, or 7%, compared
to 2015. The decrease in net income was attributable to higher
provision for credit losses and noninterest expense, offset
partially by higher net interest income and noninterest income.
Net interest income was $2.2 billion, an increase of $98
million, or 5%, compared to 2015, driven primarily by higher
average deposit balances. Deposit related net interest income
increased $64 million as average deposit balances grew $4.3
billion, or 9%, driven primarily by higher interest-bearing
transaction and money market accounts. Average loans grew
$3.7 billion, or 5%, led primarily by growth in C&I loans;
however, net interest income growth related to loans was
mitigated due to lower loan spreads.
Provision for credit losses was $272 million, an increase of
$135 million, or 99%, compared to 2015. The increase was due
primarily to higher energy-related charge-offs and loan growth.
Total noninterest income was $1.4 billion, an increase of
$71 million, or 6%, compared to 2015. The increase was driven
primarily by higher investment banking income and trading
income, which increased $33 million and $44 million,
respectively, as well as by higher tax credit-related income.
Total noninterest expense was $1.7 billion, an increase of
$153 million, or 10%, compared to 2015. The increase was due
primarily to higher employee compensation expense attributable
to improved business performance and ongoing investments in
talent, higher amortization expense associated with our new
market tax credit investments, and increased investments in
technology.
Corporate Other
Corporate Other net income was $160 million for the year ended
December 31, 2016, a decrease of $24 million, or 13%, compared
to 2015. The decrease in net income was due primarily to lower
net interest income in 2016.
Net interest income was $103 million, a decrease of $52
million, or 34%, compared to 2015. The decrease was driven
primarily by lower spreads on MBS securities and lower
commercial loan-related swap income. Average long-term debt
decreased $175 million, or 2%, and average short-term
borrowings decreased $349 million, or 18%, compared to 2015,
driven by balance sheet management activities.
Total noninterest income was $138 million, an increase of
$1 million, or 1%, compared to 2015. The increase was driven
primarily by the gain on the sale-leaseback of one of our office
buildings in 2016, offset partially by certain gains recognized in
2015, including gains from the disposition of the affordable
housing partnership, $16 million of gains related to the sale of
securities, and $14 million of trading income related to the mark-
to-market valuation.
Total noninterest expense decreased $4 million compared
to 2015, driven primarily by lower allocated expenses.
FOURTH QUARTER 2017 RESULTS
Quarter Ended December 31, 2017 vs. Quarter Ended
December 31, 2016
We reported net income available to common shareholders of
$710 million in the fourth quarter of 2017, an increase of $262
million, or 58%, compared to the same period in 2016. Earnings
per average common diluted share were $1.48 for the fourth
quarter of 2017, compared to $0.90 for the fourth quarter of 2016.
The current quarter was favorably impacted by $0.39 per share
of net discrete benefits in connection with Form 8-K and tax
reform-related items.
In the fourth quarter of 2017, net interest income was $1.5
billion, an increase of $95 million compared to the same period
in 2016. The increase was driven by higher earning asset yields
and growth of $1.8 billion in average earning assets. Net interest
margin increased 17 basis points to 3.17% for the fourth quarter
of 2017, compared to the same period in 2016. The increase was
driven primarily by higher earning asset yields arising from
higher benchmark interest rates, continued positive mix shift in
earning assets, and lower premium amortization in the securities
AFS portfolio, offset partially by higher rates paid on interest-
bearing liabilities.
The provision for credit losses was $79 million in the fourth
quarter of 2017, a decrease of $22 million compared to the same
period in 2016, due to lower net charge-offs.
Total noninterest income was $833 million in the fourth
quarter of 2017, an increase of $18 million compared to the same
period in 2016, driven largely by higher commercial real estate
related and wealth management related income as well as the
gain from the sale of PAC, offset partially by securities AFS
portfolio restructuring losses.
Trading income was $41 million in the fourth quarter of
2017, a decrease of $17 million compared to the same period in
2016, due to lower core trading revenue and higher counterparty
credit valuation reserve in the current quarter.
Mortgage production related income was $61 million in the
fourth quarter of 2017, a decrease of $17 million compared to
the fourth quarter of 2016, due to lower production volume and
a lower repurchase reserve release during the current quarter.
Mortgage servicing related income was $43 million for the fourth
quarter of 2017, an increase of $18 million compared to the same
66
period in 2016, due to higher net hedge performance, lower
servicing asset decay, and higher servicing fees during the current
quarter.
Trust and investment management income was $80 million
in the fourth quarter of 2017, an increase of $7 million compared
to the same period in 2016, due to an increase in trust and
institutional assets under management as well as trust
termination fees received during the current quarter.
Commercial real estate related income was $62 million in
the fourth quarter of 2017, an increase of $29 million compared
to the fourth quarter of 2016, driven by revenue from Pillar,
which we acquired in December 2016, in addition to higher
structured real estate and tax credit-related income earned during
the current quarter.
Net securities loss was $109 million in the fourth quarter of
2017. There were no securities (losses)/gains recognized in the
fourth quarter of 2016. The current quarter loss was due to the
restructuring of the securities AFS portfolio.
Other noninterest income was $134 million in the fourth
quarter of 2017, an increase of $105 million compared to the
same period in 2016. The increase was due primarily to the $107
million gain from the sale of PAC during the current quarter, as
announced in the December 4, 2017 Form 8-K. Excluding the
impact of the pre-tax gain from the sale of PAC, other noninterest
income was relatively stable compared to the fourth quarter of
2016.
Total noninterest expense was $1.5 billion in the fourth
quarter of 2017, an increase of $123 million compared to the
same period in 2016. The increase was due primarily to the net
impact of $111 million related to Form 8-K and tax reform-
related items ($50 million charitable contribution to support
financial well-being initiatives, $36 million net charge related to
efficiency actions, and $25 million discretionary 401(k)
contribution and other employee benefits). Excluding the impact
of these items, noninterest expense increased slightly compared
to the fourth quarter of 2016.
Employee compensation and benefits expense was $803
million in the fourth quarter of 2017, an increase of $41 million
compared to the same period in 2016, due primarily to the tax
reform-related discretionary 401(k) contribution and other
employee benefits of $25 million as well as incremental costs
related to Pillar.
Marketing and customer development expense was $104
million in the fourth quarter of 2017, an increase of $52 million
compared to fourth quarter of 2016, due primarily to the tax
reform-related charitable contribution of $50 million to support
financial well-being initiatives. Excluding the impact of this tax
reform-related item, marketing and customer development
expense was stable compared to the fourth quarter of 2016.
Amortization expense was $25 million in the fourth quarter
of 2017, an increase of $11 million compared to the same period
in 2016, due primarily to an increase in amortizable community
development investments. These investments generate tax
credits that reduce the provision for income taxes over time.
Other noninterest expense was $170 million in the fourth
quarter of 2017, an increase of $16 million compared to the fourth
quarter of 2016. The increase was driven primarily by the $36
million net charge related to efficiency actions, as announced in
the December 4, 2017 Form 8-K. This included severance costs
in connection with the voluntary early retirement program,
branch and corporate real estate closure costs, and software
write-downs.
In the fourth quarter of 2017, we recognized a benefit for
income taxes of $74 million compared to a provision of $193
million in the fourth quarter of 2016. The tax provision for the
current quarter includes a $303 million income tax benefit due
primarily to the impact of the remeasurement of our estimated
DTAs and DTLs and other tax reform-related items due to the
enactment of the 2017 Tax Act. The effective tax rate for the
fourth quarter of 2017 was (11)% compared to 29% in the fourth
quarter of 2016. Excluding the impact of Form 8-K and tax
reform-related items, the effective tax rate was 30% for the fourth
quarter of 2017.
67
Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures
Table 30
(Dollars in millions and shares in thousands,
except per share data)
Selected Quarterly Financial Data
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Noninterest income
Noninterest expense
Income before (benefit)/provision for
income taxes
(Benefit)/provision for income taxes
Net income attributable to noncontrolling
interest
Net income
Net income available to common
shareholders
Net interest income-FTE 1
Total revenue
Total revenue-FTE 1
Net income per average common share:
Diluted
Basic
Dividends declared per common share
Book value per common share
Tangible book value per common share 2
Market capitalization
Market price per common share:
High
Low
Close
Selected Average Balances:
Total assets
Earning assets
LHFI
Intangible assets including residential
MSRs
Residential MSRs
Consumer and commercial deposits
Preferred stock
Total shareholders’ equity
Average common shares - diluted
Average common shares - basic
Financial Ratios (Annualized):
ROA
ROE
ROTCE 3
Net interest margin
Net interest margin-FTE 1
Efficiency ratio 4
Efficiency ratio-FTE 1, 4
Tangible efficiency ratio-FTE 1, 4, 5
Adjusted tangible efficiency
ratio-FTE 1, 4, 5, 6
Total average shareholders’ equity to total
average assets
Tangible common equity to tangible
assets 7
Common dividend payout ratio
December 31
2017
September 30
Three Months Ended
2016
June 30
March 31
December 31
September 30
June 30
March 31
$1,640
206
1,434
79
1,355
833
1,520
668
(74)
2
$740
$710
$1,472
2,267
2,305
$1.48
1.50
0.40
47.94
34.82
$1,635
205
1,430
120
1,310
846
1,391
765
225
2
$538
$512
$1,467
2,276
2,313
$1.06
1.07
0.40
47.16
34.34
$1,583
180
1,403
90
1,313
827
1,388
752
222
2
$528
$505
$1,439
2,230
2,266
$1.03
1.05
0.26
46.51
33.83
$1,528
162
1,366
119
1,247
847
1,465
629
159
2
$468
$451
$1,400
2,213
2,247
$0.91
0.92
0.26
45.62
33.05
$1,492
149
1,343
101
1,242
815
1,397
660
193
2
$465
$448
$1,377
2,158
2,192
$0.90
0.91
0.26
45.38
32.95
$1,451
143
1,308
97
1,211
889
1,409
691
215
2
$474
$457
$1,342
2,197
2,231
$0.91
0.92
0.26
46.63
34.33
$1,424
136
1,288
146
1,142
898
1,345
695
201
2
$492
$475
$1,323
2,186
2,221
$0.94
0.95
0.24
46.14
33.98
$1,411
129
1,282
101
1,181
781
1,318
644
195
2
$447
$430
$1,318
2,063
2,099
$0.84
0.85
0.24
44.97
32.89
30,417
28,451
27,319
26,860
26,942
21,722
20,598
18,236
$66.62
56.30
64.59
$205,219
184,306
144,039
8,077
1,662
160,745
2,236
24,806
480,359
474,300
1.43%
12.54
17.24
3.09
3.17
67.03
65.94
64.84
59.85
12.09
8.21
26.8
$60.04
51.96
59.77
$58.75
52.69
56.72
$61.69
52.71
55.30
$205,738
184,861
144,706
$204,494
184,057
144,440
$204,252
183,606
143,670
8,009
1,589
159,419
1,975
24,573
483,640
478,258
8,024
1,603
159,136
1,720
24,139
488,020
482,913
8,026
1,604
158,874
1,225
23,671
496,002
490,091
0.93%
8.19
11.28
3.02
3.09
66.20
65.19
64.60
64.60
11.59
8.06
28.3
1.04%
9.03
12.45
3.07
3.15
61.12
60.14
59.21
59.21
11.94
8.10
37.2
1.03%
9.08
12.51
3.06
3.14
62.24
61.24
60.59
60.59
11.80
8.11
24.8
68
$56.48
43.41
54.85
$203,146
182,475
142,578
7,654
1,291
157,996
1,225
24,044
497,055
491,497
0.91%
7.85
10.76
2.93
3.00
64.74
63.73
63.08
63.08
11.84
8.15
28.5
$44.61
38.75
43.80
$44.32
35.10
41.08
$42.04
31.07
36.08
$201,476
180,523
142,257
$198,305
178,055
141,238
$193,014
174,189
138,372
7,415
1,065
155,313
1,225
24,410
500,885
496,304
7,543
1,192
154,166
1,225
24,018
505,633
501,374
7,569
1,215
149,229
1,225
23,797
509,931
505,482
0.94%
7.89
10.73
2.88
2.96
64.13
63.14
62.54
62.54
12.12
8.57
28.2
1.00%
8.43
11.54
2.91
2.99
61.53
60.56
60.05
60.05
12.11
8.85
25.3
0.93%
7.71
10.60
2.96
3.04
63.89
62.81
62.33
62.33
12.33
8.85
28.2
Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures (continued)
December 31
2017
September 30
Three Months Ended
2016
June 30
March 31
December 31
September 30
June 30
March 31
Selected Quarterly Financial Data (continued)
Capital Ratios at period end 8:
CET1
CET1 - fully phased-in
Tier 1 capital
Total capital
Leverage
9.74%
9.59
11.15
13.09
9.80
9.62%
9.48
10.74
12.69
9.50
9.68%
9.53
10.81
12.75
9.55
9.69%
9.54
10.40
12.37
9.08
9.59%
9.43
10.28
12.26
9.22
9.78%
9.66
10.50
12.57
9.28
9.84%
9.73
10.57
12.68
9.35
9.90%
9.77
10.63
12.39
9.50
(Dollars in millions, except per share data)
Reconcilement of Non-U.S. GAAP Measures - Quarterly
Net interest margin
Impact of FTE adjustment
Net interest margin-FTE 1
3.09%
0.08
3.17%
December 31
Efficiency ratio 4
Impact of FTE adjustment
Efficiency ratio-FTE 1, 4
Impact of excluding amortization related to
intangible assets and certain tax credits
Tangible efficiency ratio-FTE 1, 4, 5
Impact of excluding Form 8-K and other
items
Adjusted tangible efficiency ratio-FTE 1, 4, 5, 6
ROE
Impact of removing average intangible assets
other than residential MSRs and other
servicing rights from average common
shareholders' equity, and removing related
pre-tax amortization expense from net
income available to common shareholders
ROTCE 3
Net interest income
FTE adjustment
Net interest income-FTE 1
Noninterest income
Total revenue-FTE 1
Total shareholders’ equity
Goodwill, net of deferred taxes 9
Other intangible assets (including residential
MSRs and other servicing rights)
Residential MSRs and other servicing rights
Tangible equity 7
Noncontrolling interest
Preferred stock
Tangible common equity 7
Total assets
Goodwill
Other intangible assets (including residential
MSRs and other servicing rights)
Residential MSRs and other servicing rights
Tangible assets
Tangible common equity to tangible assets 7
Tangible book value per common share 2
2017
September 30
Three Months Ended
2016
June 30
March 31
December 31
September 30
June 30
March 31
3.07%
0.08
3.15%
61.12%
(0.98)
60.14
(0.93)
59.21
—
3.06%
0.08
3.14%
62.24%
(1.00)
61.24
(0.65)
60.59
—
3.02%
0.07
3.09%
66.20%
(1.01)
65.19
(0.59)
64.60
—
2.93%
0.07
3.00%
64.74%
(1.01)
63.73
(0.65)
63.08
—
2.88%
0.08
2.96%
64.13%
(0.99)
63.14
(0.60)
62.54
—
2.91%
0.08
2.99%
61.53%
(0.97)
60.56
(0.51)
60.05
—
2.96%
0.08
3.04%
63.89%
(1.08)
62.81
(0.48)
62.33
—
59.21%
60.59%
64.60%
63.08%
62.54%
60.05%
62.33%
9.03%
9.08%
8.19%
7.85%
7.89%
8.43%
7.71%
67.03%
(1.09)
65.94
(1.10)
64.84
(4.99)
59.85%
12.54%
4.70
17.24%
3.42
3.43
3.09
12.45%
12.51%
11.28%
2.91
10.76%
2.84
3.11
2.89
10.73%
11.54%
10.60%
$1,434
38
1,472
833
$2,305
$25,154
(6,168)
(1,791)
1,776
18,971
(103)
(2,475)
$16,393
$1,430
37
1,467
846
$2,313
$24,522
(6,084)
(1,706)
1,690
18,422
(101)
(1,975)
$16,346
$1,403
36
1,439
827
$2,266
$24,477
(6,085)
(1,689)
1,671
18,374
(103)
(1,975)
$16,296
$1,366
34
1,400
847
$2,247
$23,484
(6,086)
(1,729)
1,711
17,380
(101)
(1,225)
$16,054
$1,343
34
1,377
815
$2,192
$23,618
(6,086)
(1,657)
1,638
17,513
(103)
(1,225)
$16,185
$1,308
34
1,342
889
$2,231
$24,449
(6,089)
(1,131)
1,124
18,353
(101)
(1,225)
$17,027
$1,288
35
1,323
898
$2,221
$24,464
(6,091)
(1,075)
1,067
18,365
(103)
(1,225)
$17,037
$1,282
36
1,318
781
$2,099
$24,053
(6,094)
(1,198)
1,189
17,950
(101)
(1,225)
$16,624
$205,962
(6,331)
$208,252
(6,338)
$207,223
(6,338)
$205,642
(6,338)
$204,875
(6,337)
$205,091
(6,337)
$198,892
(6,337)
$194,158
(6,337)
(1,791)
1,776
(1,706)
1,690
(1,689)
1,671
(1,729)
1,711
(1,657)
1,638
(1,131)
1,124
(1,075)
1,067
(1,198)
1,189
$199,616
$201,898
$200,867
$199,286
$198,519
$198,747
$192,547
$187,812
8.21%
$34.82
8.10%
8.11%
8.06%
$34.34
$33.83
$33.05
8.15%
$32.95
8.57%
8.85%
8.85%
$34.33
$33.98
$32.89
69
Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures (continued)
(Dollars in millions, except per share data)
2017
2016
2015
2014
2013
Year Ended December 31
Reconcilement of Non-U.S. GAAP Measures - Annual
Net interest margin
Impact of FTE adjustment
Net interest margin-FTE 1
Efficiency ratio 4, 10
Impact of FTE adjustment
Efficiency ratio-FTE 1, 4, 10
Impact of excluding amortization related to intangible assets and certain tax credits
Tangible efficiency ratio-FTE 1, 4, 5, 10
Impact of excluding Form 8-K and other items
Adjusted tangible efficiency ratio-FTE 1, 4, 5, 6, 10
ROE
Impact of removing average intangible assets other than residential MSRs and other
servicing rights from average common shareholders' equity, and removing related
pre-tax amortization expense from net income available to common shareholders
ROTCE 3
Net interest income
FTE adjustment
Net interest income-FTE 1
Noninterest income
Total revenue-FTE 1
Impact of excluding Form 8-K items
Total adjusted revenue-FTE 1, 6
Net income available to common shareholders
Impact of excluding Form 8-K and other items
Adjusted net income available to common shareholders 6
Noninterest income
Impact of excluding Form 8-K items
Adjusted noninterest income 6
Noninterest expense 10
Impact of excluding Form 8-K and other items
Adjusted noninterest expense 6, 10
Diluted net income per average common share
Impact of excluding Form 8-K and other items
Adjusted diluted net income per average common share 6
At December 31:
Total shareholders’ equity
Goodwill, net of deferred taxes 9
Other intangible assets (including residential MSRs and other servicing rights)
Residential MSRs and other servicing rights
Tangible equity 7
Noncontrolling interest
Preferred stock
Tangible common equity 7
Total assets
Goodwill
Other intangible assets (including residential MSRs and other servicing rights)
Residential MSRs and other servicing rights
Tangible assets
Tangible common equity to tangible assets 7
Tangible book value per common share 2
3.06%
0.08
3.14%
64.14%
(1.02)
63.12
(0.82)
62.30
(1.26)
61.04%
9.72%
3.67
13.39%
2.92%
0.08
3.00%
63.55%
(1.00)
62.55
(0.56)
61.99
—
61.99%
7.97%
2.94
10.91%
2.82%
0.09
2.91%
64.24%
(1.11)
63.13
(0.49)
62.64
—
62.64%
8.46%
3.29
11.75%
2.98%
0.09
3.07%
67.90%
(1.16)
66.74
(0.30)
66.44
(3.10)
63.34%
8.10%
3.39
11.49%
3.16%
0.08
3.24%
72.28%
(1.12)
71.16
(0.27)
70.89
(5.62)
65.27%
6.38%
2.99
9.37%
$5,633
$5,221
$4,764
$4,840
$4,853
145
5,778
3,354
9,132
—
$9,132
$2,179
—
$2,179
$3,354
—
$3,354
$5,764
—
$5,764
$4.47
—
$4.47
138
5,359
3,383
8,742
—
$8,742
$1,811
—
$1,811
$3,383
—
$3,383
$5,468
—
$5,468
$3.60
—
$3.60
142
4,906
3,268
8,174
—
$8,174
$1,863
—
$1,863
$3,268
—
$3,268
$5,160
—
$5,160
$3.58
—
$3.58
142
4,982
3,323
8,305
(105)
$8,200
$1,722
7
$1,729
$3,323
(105)
$3,218
$5,543
(324)
$5,219
$3.23
0.01
$3.24
$25,154
$23,618
$23,437
$23,005
(6,168)
(1,791)
1,776
18,971
(103)
(2,475)
(6,086)
(1,657)
1,638
17,513
(103)
(1,225)
(6,097)
(1,325)
1,316
17,331
(108)
(1,225)
(6,123)
(1,219)
1,206
16,869
(108)
(1,225)
$16,393
$205,962
$16,185
$204,875
$15,998
$190,817
$15,536
$190,328
(6,331)
(1,791)
1,776
(6,337)
(1,657)
1,638
(6,337)
(1,325)
1,316
(6,337)
(1,219)
1,206
$199,616
$198,519
$184,471
$183,978
127
4,980
3,214
8,194
63
$8,257
$1,297
179
$1,476
$3,214
63
$3,277
$5,831
(419)
$5,412
$2.41
0.33
$2.74
$21,422
(6,183)
(1,334)
1,300
15,205
(119)
(725)
$14,361
$175,335
(6,369)
(1,334)
1,300
$168,932
8.21%
8.15%
8.67%
8.44%
8.50%
$34.82
$32.95
$31.45
$29.62
$26.79
70
Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures (continued)
Reconciliation of fully phased-in CET1 Ratio 8
CET1
Less:
Servicing rights
Other 11
CET1 - fully phased-in
(Dollars in millions)
Reconciliation of PPNR 12
Income before provision for income taxes
Provision for credit losses
Less:
Net securities losses
PPNR
December 31, 2017
December 31, 2016
9.74%
(0.14)
(0.01)
9.59%
9.59%
(0.13)
(0.03)
9.43%
Year Ended
December 31, 2017
$2,814
409
(108)
$3,331
1 We present Net interest income-FTE, Total revenue-FTE, Net interest margin-FTE, Efficiency ratio-FTE, Tangible efficiency ratio-FTE, Adjusted tangible efficiency
ratio-FTE, and Total adjusted revenue-FTE on a fully taxable-equivalent ("FTE") basis. The FTE basis adjusts for the tax-favored status of Net interest income from
certain loans and investments using a federal tax rate of 35% and state income taxes, where applicable, to increase tax-exempt interest income to a taxable-equivalent
basis. We believe the FTE basis is the preferred industry measurement basis for these measures and that it enhances comparability of Net interest income arising
from taxable and tax-exempt sources. Total revenue-FTE is calculated as Net interest income-FTE plus Noninterest income. Net interest margin-FTE is calculated
by dividing annualized Net interest income-FTE by average Total earning assets.
2 We present Tangible book value per common share, which removes the after-tax impact of purchase accounting intangible assets, Noncontrolling interest, and
Preferred stock from shareholders' equity. We believe this measure is useful to investors because, by removing the amount of intangible assets that result from
merger and acquisition activity, and removing the amounts of noncontrolling interest and preferred stock that do not represent our common shareholders' equity, it
allows investors to more easily compare our capital position to other companies in the industry.
3 We present ROTCE, which removes the after-tax impact of purchase accounting intangible assets from average common shareholders' equity and removes the
related intangible asset amortization from Net income available to common shareholders. We believe this measure is useful to investors because, by removing the
amount of intangible assets that result from merger and acquisition activity and related amortization expense (the level of which may vary from company to company),
it allows investors to more easily compare our ROTCE to other companies in the industry who present a similar measure. We also believe that removing these items
provides a more relevant measure of our Return on average common shareholders' equity. This measure is utilized by management to assess our profitability.
4 Efficiency ratio is computed by dividing Noninterest expense by Total revenue. Efficiency ratio-FTE is computed by dividing Noninterest expense by Total revenue-
FTE.
5 We present Tangible efficiency ratio-FTE and Adjusted tangible efficiency ratio-FTE, which exclude amortization related to intangible assets and certain tax credits.
We believe these measures are useful to investors because, by removing the impact of amortization (the level of which may vary from company to company), it
allows investors to more easily compare our efficiency to other companies in the industry. Tangible efficiency ratio-FTE is utilized by management to assess our
efficiency and that of our lines of business.
6 We present certain income statement categories and also Adjusted tangible efficiency ratio-FTE, Total adjusted revenue-FTE, Adjusted net income available to
common shareholders, Adjusted noninterest income, Adjusted noninterest expense, and Adjusted diluted net income per average common share, excluding Form
8-K items and other tax reform-related and legacy mortgage-related items. We believe these measures are useful to investors because it removes the effect of material
items impacting the periods' results and is more reflective of normalized operations as it reflects results that are primarily client relationship and client transaction
driven. Removing these items also allows investors to compare our results to other companies in the industry that may not have had similar items impacting their
results. Additional detail on certain of these items can be found in the Form 8-Ks filed with the SEC on December 4, 2017, January 5, 2015, September 9, 2014,
July 3, 2014, and October 10, 2013.
7 We present certain capital information on a tangible basis, including the ratio of Tangible common equity to tangible assets, Tangible equity, and Tangible common
equity, which removes the after-tax impact of purchase accounting intangible assets. We believe these measures are useful to investors because, by removing the
amount of intangible assets that result from merger and acquisition activity (the level of which may vary from company to company), it allows investors to more
easily compare our capital position to other companies in the industry. These measures are utilized by management to analyze capital adequacy.
8 The CET1 ratio on a fully phased-in basis at December 31, 2017 and 2016 is estimated and is presented to provide investors with an indication of our capital adequacy
under the future CET1 requirements.
9 Net of deferred tax liabilities of $163 million, $254 million, $253 million, and $252 million at December 31, 2017, September 30, 2017, June 30, 2017, and March
31, 2017, respectively. Net of deferred tax liabilities of $251 million, $248 million, $246 million, and $243 million at December 31, 2016, September 30, 2016,
June 30, 2016, and March 31, 2016, respectively.Net of deferred tax liabilities of $240 million, $214 million, and $186 million at December 31, 2015, 2014, 2013,
respectively.
10 Amortization expense related to qualified affordable housing investment costs is recognized in Provision for income taxes for all periods presented as allowed by
an accounting standard adopted in 2014. Prior to the first quarter of 2014, these amounts were recognized in Other noninterest expense, and therefore, for comparative
purposes, $49 million of amortization expense was reclassified to Provision for income taxes for the year ended December 31, 2013.
11 Primarily includes the deduction from capital of certain carryforward DTAs, the overfunded pension asset, and other intangible assets.
12 We present the reconciliation of PPNR because it is a performance metric utilized by management and in certain of our compensation plans. PPNR impacts the
level of awards if certain thresholds are met. We believe this measure is useful to investors because it allows investors to compare our PPNR to other companies in
the industry who present a similar measure.
71
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the “Enterprise Risk Management” section of the MD&A in this Form 10-K, which is incorporated herein by reference.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of SunTrust Banks, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SunTrust Banks, Inc. (the Company) as of December 31, 2017
and 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of SunTrust Banks,
Inc. at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Atlanta, Georgia
February 23, 2018
72
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of SunTrust Banks, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited SunTrust Banks, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (the COSO criteria). In our opinion, SunTrust Banks, Inc. (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of SunTrust Banks, Inc. as of December 31, 2017 and 2016, and the related consolidated statements
of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31,
2017, and the related notes, of the Company and our report dated February 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Atlanta, Georgia
February 23, 2018
73
/s/ Ernst & Young LLP
SunTrust Banks, Inc.
Consolidated Statements of Income
(Dollars in millions and shares in thousands, except per share data)
Interest Income
Interest and fees on loans held for investment
Interest and fees on loans held for sale
Interest and dividends on securities available for sale
Trading account interest and other
Total interest income
Interest Expense
Interest on deposits
Interest on long-term debt
Interest on other borrowings
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest Income
Service charges on deposit accounts
Other charges and fees
Card fees
Investment banking income
Trading income
Trust and investment management income
Retail investment services
Mortgage production related income
Mortgage servicing related income
Gain on sale of subsidiary
Commercial real estate related income 1
Net securities (losses)/gains
Other noninterest income 1
Total noninterest income
Noninterest Expense
Employee compensation
Employee benefits
Outside processing and software
Net occupancy expense
Marketing and customer development
Regulatory assessments
Equipment expense
Other staff expense
Amortization
Consulting and legal fees
Operating losses
Other noninterest expense
Total noninterest expense
Income before provision for income taxes
Provision for income taxes
Net income including income attributable to noncontrolling interest
Less: Net income attributable to noncontrolling interest
Net income
Net income available to common shareholders
Net income per average common share:
Diluted
Basic
Year Ended December 31
2016
2015
2017
$5,385
99
774
129
6,387
404
288
62
754
5,633
409
5,224
603
385
344
599
189
309
278
231
191
107
123
(108)
103
3,354
2,854
403
826
377
232
187
164
121
75
71
40
414
5,764
2,814
532
2,282
9
$2,273
$2,179
$4,939
92
651
96
5,778
259
260
38
557
5,221
444
4,777
630
380
327
494
211
304
281
366
189
—
69
4
128
3,383
2,698
373
834
349
172
173
170
67
49
93
108
382
5,468
2,692
805
1,887
9
$1,878
$1,811
$4,506
82
593
84
5,265
219
252
30
501
4,764
165
4,599
622
377
329
461
181
334
300
270
169
—
56
21
148
3,268
2,576
366
815
341
151
139
164
65
40
73
56
374
5,160
2,707
764
1,943
10
$1,933
$1,863
Dividends declared per common share
Average common shares outstanding - diluted
Average common shares outstanding - basic
1 Beginning January 1, 2017, the Company began presenting income related to the Company's Pillar, STCC, and Structured Real Estate businesses as a separate line
item on the Consolidated Statements of Income titled Commercial real estate related income. For periods prior to January 1, 2017, these amounts were previously
presented in Other noninterest income and have been reclassified to Commercial real estate related income for comparability.
$4.47
4.53
1.32
486,954
481,339
$3.60
3.63
1.00
503,466
498,638
$3.58
3.62
0.92
520,586
514,844
See accompanying Notes to Consolidated Financial Statements.
74
SunTrust Banks, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in millions)
Net income
Components of other comprehensive income/(loss):
Change in net unrealized gains/(losses) on securities available for sale,
net of tax of $29, ($117), and ($93), respectively
Change in net unrealized losses on derivative instruments,
net of tax of $0, ($145), and ($5), respectively
Change in net unrealized losses on brokered time deposits,
net of tax of $0, $0, and $0, respectively
Change in credit risk adjustment on long-term debt,
net of tax of $3, ($1), and $0, respectively
Change related to employee benefit plans,
net of tax of $138, $52, and ($103), respectively
Total other comprehensive income/(loss), net of tax
Year Ended December 31
2017 1
2016
2015
$2,273
$1,878
$1,933
61
(87)
—
3
24
1
(197)
(244)
(1)
(2)
88
(356)
(163)
(10)
—
—
(165)
(338)
Total comprehensive income
$2,274
$1,522
$1,595
1 Net of tax amounts include the stranded tax effects resulting from the 2017 Tax Act. See Note 1, “Significant Accounting Policies,” for additional information.
See accompanying Notes to Consolidated Financial Statements.
75
SunTrust Banks, Inc.
Consolidated Balance Sheets
(Dollars in millions and shares in thousands, except per share data)
Assets
Cash and due from banks
Federal funds sold and securities borrowed or purchased under agreements to resell
Interest-bearing deposits in other banks
Cash and cash equivalents
Trading assets and derivative instruments 1
Securities available for sale 2
Loans held for sale ($1,577 and $3,540 at fair value at December 31, 2017 and 2016, respectively)
Loans held for investment 3 ($196 and $222 at fair value at December 31, 2017 and 2016, respectively)
Allowance for loan and lease losses
Net loans held for investment
Premises and equipment, net
Goodwill
Other intangible assets (Residential MSRs at fair value: $1,710 and $1,572 at December 31, 2017 and 2016,
respectively)
Other assets
Total assets
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits (CDs at fair value: $236 and $78 at December 31, 2017 and 2016, respectively)
Total deposits
Funds purchased
Securities sold under agreements to repurchase
Other short-term borrowings
Long-term debt 4 ($530 and $963 at fair value at December 31, 2017 and 2016, respectively)
Trading liabilities and derivative instruments
Other liabilities
Total liabilities
Shareholders’ Equity
Preferred stock, no par value
Common stock, $1.00 par value
Additional paid-in capital
Retained earnings
Treasury stock, at cost, and other 5
Accumulated other comprehensive loss, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
Common shares outstanding 6
Common shares authorized
Preferred shares outstanding
Preferred shares authorized
Treasury shares of common stock
1 Includes trading securities pledged as collateral where counterparties have the right to sell or repledge the collateral
2 Includes securities AFS pledged as collateral where counterparties have the right to sell or repledge the collateral
3 Includes loans held for investment of consolidated VIEs
4 Includes debt of consolidated VIEs
5 Includes noncontrolling interest
6 Includes restricted shares
See accompanying Notes to Consolidated Financial Statements.
76
December 31,
2017
2016
$5,349
1,538
25
6,912
5,093
31,416
2,290
143,181
(1,735)
141,446
1,734
6,331
$5,091
1,307
25
6,423
6,067
30,672
4,169
143,298
(1,709)
141,589
1,556
6,337
1,791
8,949
$205,962
1,657
6,405
$204,875
$42,784
117,996
160,780
2,561
1,503
717
9,785
1,283
4,179
180,808
2,475
550
9,000
17,540
(3,591)
(820)
25,154
$205,962
470,931
750,000
25
50,000
79,133
$1,086
223
179
189
103
9
$43,431
116,967
160,398
2,116
1,633
1,015
11,748
1,351
2,996
181,257
1,225
550
9,010
16,000
(2,346)
(821)
23,618
$204,875
491,188
750,000
12
50,000
58,738
$1,437
—
211
222
103
11
SunTrust Banks, Inc.
Consolidated Statements of Shareholders’ Equity
(Dollars and shares in millions, except per share data)
Balance, January 1, 2015
Net income
Other comprehensive loss
Common stock dividends, $0.92 per share
Preferred stock dividends 2
Repurchase of common stock
Exercise of stock options and stock compensation expense
Restricted stock activity
Amortization of restricted stock compensation
Issuance of stock for employee benefit plans and other
Preferred
Stock
$1,225
Common
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
525
$550
$9,089
$13,295
Treasury
Stock
and Other 1
($1,032)
Accumulated
Other
Comprehensive
Loss
Total
($122)
$23,005
—
—
—
—
—
—
—
—
—
—
—
—
—
(17)
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(18)
23
—
—
1,933
—
(475)
(64)
—
—
(3)
—
—
—
—
—
—
(679)
30
4
16
3
—
(338)
—
—
—
—
—
—
—
1,933
(338)
(475)
(64)
(679)
12
24
16
3
Balance, December 31, 2015
$1,225
509
$550
$9,094
$14,686
($1,658)
($460)
$23,437
Cumulative effect of credit risk adjustment 3
Net income
Other comprehensive loss
Change in noncontrolling interest
Common stock dividends, $1.00 per share
Preferred stock dividends 2
Repurchase of common stock
Repurchase of common stock warrants
Exercise of stock options and stock compensation expense 4
Restricted stock activity 4
Amortization of restricted stock compensation
Balance, December 31, 2016
Net income
Other comprehensive income
Common stock dividends, $1.32 per share
Preferred stock dividends 2
Issuance of preferred stock, Series G and H
Repurchase of common stock
Exercise of stock options and stock compensation expense
Restricted stock activity
Balance, December 31, 2017
—
—
—
—
—
—
—
—
—
—
—
$1,225
—
—
—
—
1,250
—
—
—
—
—
—
—
—
—
(20)
—
1
1
—
491
—
—
—
—
—
(22)
1
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(24)
(40)
(20)
—
5
1,878
—
—
(498)
(66)
—
—
—
(5)
—
—
—
—
(5)
—
—
(806)
—
65
56
2
(5)
—
(356)
—
—
—
—
—
—
—
—
—
1,878
(356)
(5)
(498)
(66)
(806)
(24)
25
31
2
$550
$9,010
$16,000
($2,346)
($821)
$23,618
—
—
—
—
—
—
—
—
—
—
—
—
(11)
—
(15)
16
2,273
—
(634)
(94)
—
—
—
(5)
—
—
—
—
—
(1,314)
36
33
—
1
—
—
—
—
—
—
2,273
1
(634)
(94)
1,239
(1,314)
21
44
$2,475
471
$550
$9,000
$17,540
($3,591)
($820)
$25,154
1 At December 31, 2017, includes ($3,694) million for treasury stock and $103 million for noncontrolling interest.
At December 31, 2016, includes ($2,448) million for treasury stock, ($1) million for the compensation element of restricted stock, and $103 million for noncontrolling interest.
At December 31, 2015, includes ($1,764) million for treasury stock,($2) million for the compensation element of restricted stock, and $108 million for noncontrolling interest.
2 For the year ended December 31, 2017, dividends were $4,056 per share for both Perpetual Preferred Stock Series A and B, $5,875 per share for Perpetual Preferred Stock Series
E, $5,625 per share for Perpetual Preferred Stock Series F, $3,128 per share for Perpetual Preferred Stock Series G, and $669 per share for Perpetual Preferred Stock Series H.
For the year ended December 31, 2016, dividends were $4,067 per share for both Perpetual Preferred Stock Series A and B, $5,875 per share for Perpetual Preferred Stock Series
E, and $5,625 per share for Perpetual Preferred Stock Series F.
For the year ended December 31, 2015, dividends were $4,056 per share for both Perpetual Preferred Stock Series A and B, and $5,875 per share for Perpetual Preferred Stock Series
E, and $6,219 per share for Perpetual Preferred Stock Series F.
3 Related to the Company's early adoption of the ASU 2016-01 provision related to changes in instrument-specific credit risk, beginning January 1, 2016. See Note 1, "Significant
Accounting Policies," and Note 21, "Accumulated Other Comprehensive Loss," for additional information.
4 Includes a ($4) million net reclassification of excess tax benefits from Additional paid-in capital to Provision for income taxes, related to the Company's adoption of ASU 2016-09.
See accompanying Notes to Consolidated Financial Statements.
77
SunTrust Banks, Inc.
Consolidated Statements of Cash Flows
(Dollars in millions)
Cash Flows from Operating Activities:
Net income including income attributable to noncontrolling interest
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Year Ended December 31
2016
2015
2017
$2,282
$1,887
$1,943
Gain on sale of subsidiary
Depreciation, amortization, and accretion
Origination of servicing rights
Provisions for credit losses and foreclosed property
Deferred income tax expense
Stock-based compensation
Net securities losses/(gains)
Net gain on sale of loans held for sale, loans, and other assets
Net decrease/(increase) in loans held for sale
Net decrease/(increase) in trading assets and derivative instruments
Net decrease/(increase) in other assets
Net decrease in other liabilities
Net cash provided by/(used in) operating activities
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and paydowns of securities available for sale
Proceeds from sales of securities available for sale
Purchases of securities available for sale
Net increase in loans, including purchases of loans
Proceeds from sales of loans
Net cash paid for servicing rights
Capital expenditures
Payments related to acquisitions, including contingent consideration, net of cash acquired
Consideration received from sale of subsidiary
Proceeds from the sale of other real estate owned and other assets
Net cash used in investing activities
Cash Flows from Financing Activities:
Net increase in total deposits
Net increase/(decrease) in funds purchased, securities sold under agreements to repurchase, and
other short-term borrowings
Proceeds from issuance of long-term debt
Repayments of long-term debt
Proceeds from the issuance of preferred stock
Repurchase of common stock
Repurchase of common stock warrants
Common and preferred stock dividends paid
Taxes paid related to net share settlement of equity awards
Proceeds from exercise of stock options
Net cash (used in)/provided by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosures:
Interest paid
Income taxes paid
Income taxes refunded
Loans transferred from loans held for sale to loans held for investment
Loans transferred from loans held for investment to loans held for sale
Loans transferred from loans held for investment and loans held for sale to other real estate owned
Amortization of deferred gain on sale leaseback of premises
Non-cash impact of debt assumed by purchaser in lease sale
See accompanying Notes to Consolidated Financial Statements.
78
(107)
727
(411)
418
344
160
108
(269)
2,099
834
235
(911)
5,509
4,186
2,854
(8,299)
(2,425)
720
(7)
(410)
—
261
235
(2,885)
382
17
2,844
(4,562)
1,239
(1,314)
—
(723)
(39)
21
(2,135)
489
6,423
$6,912
$730
415
(3)
19
288
57
17
184
—
725
(312)
449
111
126
(4)
(428)
(1,819)
(342)
(800)
(274)
(681)
5,108
197
(8,610)
(9,032)
1,612
(171)
(283)
(211)
—
233
(11,157)
10,568
37
6,705
(3,231)
—
(806)
(24)
(564)
(48)
25
12,662
824
5,599
$6,423
$559
813
(2)
30
360
59
43
74
—
786
(238)
176
21
89
(21)
(323)
1,625
67
(407)
(166)
3,552
5,680
2,708
(9,882)
(5,897)
2,127
(117)
(186)
(30)
—
281
(5,316)
9,263
(4,559)
1,351
(5,684)
—
(679)
—
(539)
(36)
17
(866)
(2,630)
8,229
$5,599
$523
497
(1)
741
1,790
67
54
190
Notes to Consolidated Financial Statements
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
General
SunTrust, one of the nation's largest commercial banking
organizations, is a financial services holding company with its
headquarters located in Atlanta, Georgia. Through its principal
subsidiary, SunTrust Bank, the Company offers a full line of
financial services for consumers, businesses, corporations,
institutions, and not-for-profit entities, both through its branches
(located primarily in Florida, Georgia, Virginia, North Carolina,
Tennessee, Maryland, South Carolina, and the District of
Columbia) and through other national delivery channels. In
addition to deposit, credit, and trust and investment services
provided by the Bank, the Company's other subsidiaries provide
capital markets, mortgage banking, securities brokerage,
investment banking, and wealth management services. The
Company operates and measures business activity across two
business segments: Consumer and Wholesale, with functional
activities
in Corporate Other. For additional
information on the Company’s business segments, see Note 20,
“Business Segment Reporting.”
included
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements have been prepared in
accordance with U.S. GAAP and include the accounts of the
Company and its subsidiaries after elimination of significant
intercompany accounts and transactions. In the opinion of
management, all adjustments, consisting only of normal
recurring adjustments that are necessary for a fair presentation
of the results of operations in these financial statements, have
been made.
The Company holds VIs, which are contractual, ownership
or other interests that fluctuate with changes in the fair value of
a VIE's net assets. The Company consolidates a VIE if it is the
primary beneficiary, which is the party that has both the power
to direct the activities that most significantly impact the financial
performance of the VIE and the obligation to absorb losses or
rights to receive benefits through its VIs that could potentially
be significant to the VIE. To determine whether or not a VI held
by the Company could potentially be significant to the VIE, both
qualitative and quantitative factors regarding the nature, size,
and form of the Company's involvement with the VIE are
considered. The assessment of whether or not the Company is
the primary beneficiary of a VIE is performed on an ongoing
basis. The Company consolidates VOEs that are controlled
through the Company's equity interests or by other means.
Investments in entities for which the Company has the
ability to exercise significant influence, but not control, over
operating and financing decisions are accounted for using the
equity method of accounting. These investments are included in
Other assets in the Consolidated Balance Sheets at cost, adjusted
to reflect the Company's portion of income, loss, or dividends
of the investee. Non marketable equity investments that do not
meet the criteria to be accounted for under the equity method
and that do not result in consolidation of the investee are
accounted for under the cost method of accounting. Cost method
investments are included in Other assets in the Consolidated
Balance Sheets and dividends received from these investments
are included as a component of Other noninterest income in the
79
Consolidated Statements of Income, to the extent the dividends
are distributed from net accumulated earnings of the investee
since the date of acquisition. Dividends received from these
investments in excess of earnings, subsequent to the date of
investment, are recorded as a reduction to the cost of the
investment.
Results of operations of acquired entities are included from
the date of acquisition. Results of operations associated with
entities or net assets sold are included through the date of
disposition. The Company reports any noncontrolling interests
in its subsidiaries in the equity section of the Consolidated
Balance Sheets and separately presents the income or loss
attributable to the noncontrolling interest of a consolidated
subsidiary in its Consolidated Statements of Income.
Assets and liabilities of acquired entities are accounted for
under the acquisition method of accounting, whereby the
purchase price of an acquired entity is allocated to the estimated
fair value of the assets acquired and liabilities assumed at the
date of acquisition. The excess of the purchase price over the
amount allocated to the assets acquired and liabilities assumed
is recorded as goodwill.
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 Consolidated
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 events that occurred between
December 31, 2017 and the date the accompanying financial
statements were issued, and there were no material events, other
than those already discussed in this Form 10-K, that would
require recognition in the Company's Consolidated Financial
Statements or disclosure in the accompanying Notes.
Cash and Cash Equivalents
Cash and cash equivalents include Cash and due from banks,
Interest-bearing deposits in other banks, Fed Funds sold, and
Securities borrowed or purchased under agreements to resell.
Cash and cash equivalents have maturities of three months or
less, and accordingly, the carrying amount of these instruments
is deemed to be a reasonable estimate of fair value.
Trading Activities and Securities AFS
Debt securities and marketable equity securities are classified at
trade date as trading or securities AFS. Trading assets and
liabilities are measured at fair value with changes in fair value
recognized within Noninterest income. Securities AFS are used
as part of the overall asset and liability management process to
optimize income and market performance over an entire interest
rate cycle. Interest income and dividends on securities AFS are
recognized in interest income on an accrual basis. Premiums and
discounts on debt securities AFS are amortized or accreted as an
adjustment to yield over the life of the security. The Company
estimates principal prepayments on securities AFS for which
prepayments are probable and the timing and amount of
prepayments can be reasonably estimated. The estimates are
Notes to Consolidated Financial Statements, continued
informed by analyses of both historical prepayments and
anticipated macroeconomic conditions, such as spot interest
rates compared to implied forward interest rates. The estimate
of prepayments for these debt securities impacts their lives and
thereby the amortization or accretion of associated premiums
and discounts. Securities AFS are measured at fair value with
unrealized gains and losses, net of any tax effect, included in
AOCI as a component of shareholders’ equity. Realized gains
and losses, including OTTI, are determined using the specific
identification method and are recognized as a component of
Noninterest income in the Consolidated Statements of Income.
Securities AFS are reviewed for OTTI on a quarterly basis.
In determining whether OTTI exists for securities in an
unrealized loss position, the Company assesses whether it has
the intent to sell the security or, for debt securities, the Company
assesses the likelihood of selling the security prior to the recovery
of its amortized cost basis. If the Company intends to sell the
debt security or it is more-likely-than-not that the Company will
be required to sell the debt security prior to the recovery of its
amortized cost basis, the debt security is written down to fair
value, and the full amount of any impairment charge is
recognized as a component of Noninterest income in the
Consolidated Statements of Income. If the Company does not
intend to sell the debt security and it is more-likely-than-not that
the Company will not be required to sell the debt security prior
to recovery of its amortized cost basis, only the credit component
of any impairment of a debt security is recognized as a component
of Noninterest income in the Consolidated Statements of Income,
with the remaining impairment balance recorded in OCI.
The OTTI review for marketable equity securities includes
an analysis of the facts and circumstances of each individual
investment and focuses on the severity of loss, the length of time
the fair value has been below cost, the expectation for that
security's performance, the financial condition and near-term
prospects of the issuer, and management's intent and ability to
hold the security to recovery. A decline in value of an equity
security that is considered to be other-than-temporary is
recognized as a component of Noninterest income in the
Consolidated Statements of Income.
Nonmarketable equity securities are accounted for under the
cost or equity method and are included in Other assets in the
reviews
Consolidated Balance Sheets. The Company
nonmarketable securities accounted for under the cost method
on a quarterly basis, and reduces the asset value when declines
in value are considered to be other-than-temporary. Equity
method investments are recorded at cost, adjusted to reflect the
Company’s portion of income, loss, or dividends of the investee.
Realized income, realized losses, and estimated other-than-
temporary losses on cost and equity method investments are
the Consolidated
recognized
Statements of Income.
in Noninterest
income
in
For additional information on the Company’s securities
activities, see Note 4, “Trading Assets and Liabilities and
Derivatives,” and Note 5, “Securities Available for Sale.”
Loans Held for Sale
The Company’s LHFS generally includes certain commercial
loans and consumer loans. Loans are initially classified as LHFS
when they are individually identified as being available for
immediate sale and management has committed to a formal plan
80
to sell them. LHFS are recorded at either fair value, if elected,
or the lower of cost or fair value. Any origination fees and costs
for LHFS recorded at LOCOM are capitalized in the basis of the
loan and are included in the calculation of realized gains and
losses upon sale. Origination fees and costs are recognized in
earnings at the time of origination for LHFS that are elected to
be measured at fair value. Fair value is derived from observable
current market prices, when available, and includes loan
servicing value. When observable market prices are not
available, the Company uses judgment and estimates fair value
using internal models, in which the Company uses its best
estimates of assumptions it believes would be used by market
participants in estimating fair value. Adjustments to reflect
unrealized gains and losses resulting from changes in fair value
and realized gains and losses upon ultimate sale of the loans are
classified as Noninterest income in the Consolidated Statements
of Income.
The Company may transfer certain loans to LHFS measured
at LOCOM. At the time of transfer, any credit losses subject to
charge-off in accordance with the Company's policy are recorded
as a reduction in the ALLL. Any subsequent losses, including
those related to interest rate or liquidity related valuation
adjustments, are recorded as a component of Noninterest income
in the Consolidated Statements of Income. The Company may
also transfer loans from LHFS to LHFI. If an LHFS for which
fair value accounting was elected is transferred to held for
investment, it will continue to be accounted for at fair value in
the LHFI portfolio. For additional information on the Company’s
LHFS activities, see Note 6, “Loans.”
Commercial
Loans Held for Investment
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are considered
LHFI. The Company’s loan balance is comprised of loans held
in portfolio, including commercial loans and consumer loans.
Interest income on loans, except those classified as nonaccrual,
is accrued based upon the outstanding principal amounts using
the effective yield method.
loans
(C&I, CRE, and commercial
construction) are considered to be past due when payment is not
received from the borrower by the contractually specified due
date. The Company typically classifies commercial loans as
nonaccrual when one of the following events occurs: (i) interest
or principal has been past due 90 days or more, unless the loan
is both well secured and in the process of collection; (ii)
collection of contractual interest or principal is not anticipated;
or (iii) income for the loan is recognized on a cash basis due to
the deterioration in the financial condition of the debtor. When
a loan is placed on nonaccrual, accrued interest is reversed
against interest income. Interest income on commercial
nonaccrual loans, if recognized, is recognized after the principal
has been reduced to zero. If and when commercial borrowers
demonstrate the ability to repay a loan classified as nonaccrual
in accordance with its contractual terms, the loan may be returned
to accrual status upon meeting all regulatory, accounting, and
internal policy requirements.
Consumer
loans secured by residential real estate
(guaranteed
residential mortgages,
residential home equity products, and residential construction
loans) are considered to be past due when a monthly payment is
and nonguaranteed
Notes to Consolidated Financial Statements, continued
due and unpaid for one month. Guaranteed residential mortgages
continue to accrue interest regardless of delinquency status
because collection of principal and interest is reasonably assured
by the government. Nonguaranteed residential mortgages and
residential construction loans are generally placed on nonaccrual
when three payments are past due. Residential home equity
products are generally placed on nonaccrual when payments are
90 days past due. The exceptions for nonguaranteed residential
mortgages, residential construction loans, and residential home
equity products are: (i) when the borrower has declared
bankruptcy, in which case, they are moved to nonaccrual status
once they become 60 days past due, (ii) loans discharged in
Chapter 7 bankruptcy that have not been reaffirmed by the
borrower, in which case, they are reclassified as TDRs and moved
to nonaccrual status, and (iii) second lien loans, which are
classified as nonaccrual when the first lien loan is classified as
nonaccrual, even if the second lien loan is performing. When a
loan is placed on nonaccrual, accrued interest is reversed against
interest income. Interest income on nonaccrual consumer loans
secured by residential real estate is recognized on a cash basis.
Nonaccrual consumer loans secured by residential real estate are
typically returned to accrual status once they no longer meet the
delinquency threshold that resulted in them initially being moved
to nonaccrual status, with the exception of the aforementioned
Chapter 7 bankruptcy loans, which remain on nonaccrual until
there is six months of payment performance following discharge
by the bankruptcy court.
All other consumer loans (guaranteed student, other direct,
indirect, and credit card loans) are considered to be past due when
payment is not received from the borrower by the contractually
specified due date. Guaranteed student loans continue to accrue
interest regardless of delinquency status because collection of
principal and interest is reasonably assured. Other direct and
indirect loans are typically placed on nonaccrual when payments
have been past due for 90 days or more, except when the borrower
has declared bankruptcy, in which case they are moved to
nonaccrual status once they become 60 days past due. When a
loan is placed on nonaccrual, accrued interest is reversed against
interest income. Interest income on nonaccrual loans, if
recognized, is recognized on a cash basis. Nonaccrual consumer
loans are typically returned to accrual status once they are no
longer past due.
TDRs are loans in which the borrower is experiencing
financial difficulty at the time of restructure and the borrower
received an economic concession either from the Company or
as the product of a bankruptcy court order. A restructuring that
results in only a delay in payments that is insignificant is not
considered an economic concession. To date, the Company’s
TDRs have been predominantly first and second lien residential
mortgages and home equity lines of credit. Prior to granting a
modification of a borrower’s loan terms, the Company performs
an evaluation of the borrower’s financial condition and ability
to service under the potential modified loan terms. The types of
concessions generally granted are extensions of the loan maturity
date and/or reductions in the original contractual interest rate. In
certain situations, the Company may offer to restructure a loan
in a manner that ultimately results in the forgiveness of a
contractually specified principal balance. Typically, if a loan is
accruing interest at the time of modification, the loan remains
on accrual status and is subject to the Company’s charge-off and
nonaccrual policies. See the “Allowance for Credit Losses”
section below for further information regarding these policies.
If a loan is on nonaccrual before it is determined to be a TDR
then the loan remains on nonaccrual. Typically, TDRs may be
returned to accrual status if there has been at least a six month
sustained period of repayment performance by the borrower.
Generally, once a loan becomes a TDR, the Company expects
that the loan will continue to be reported as a TDR for its
remaining life, even after returning to accruing status, unless the
modified rates and terms at the time of modification were
available to the borrower in the market or the loan is subsequently
restructured with no concession to the borrower and the borrower
is no longer in financial difficulty. Interest income recognition
on impaired loans is dependent upon accrual status, TDR
designation, and loan type as discussed above.
For loans accounted for at amortized cost, fees and
incremental direct costs associated with the loan origination and
pricing process, as well as premiums and discounts, are deferred
and amortized over the respective loan terms. Fees received for
providing loan commitments that result in funded loans are
recognized over the term of the loan as an adjustment of the yield.
If a loan is never funded, the commitment fee is recognized in
Noninterest income at the expiration of the commitment period.
For any newly-originated loans that are accounted for at fair
value, the origination fees are recognized in Noninterest income
while the origination costs are recognized in Noninterest
expense, at the time of origination. For additional information
on the Company's loans activities, see Note 6, “Loans.”
Allowance for Credit Losses
The allowance for credit losses is composed of the ALLL and
the reserve for unfunded commitments. The Company’s ALLL
reflects probable current inherent losses in the LHFI portfolio
based on management’s evaluation of the size and current risk
characteristics of the loan portfolio. The Company employs a
variety of modeling and estimation techniques to measure credit
risk and construct an appropriate and adequate ALLL.
Quantitative and qualitative asset quality measures are
considered in estimating the ALLL. Such evaluation considers
a number of factors for each of the loan portfolio segments,
including, but not limited to, net charge-off trends, internal risk
ratings, changes in internal risk ratings, loss forecasts, collateral
values, geographic location, delinquency rates, nonperforming
and restructured loan status, origination channel, product mix,
underwriting practices, industry conditions, and economic
trends. Additionally, refreshed FICO scores are considered for
consumer loans and single name borrower concentration is
considered for commercial loans. These credit quality factors are
incorporated into various loss estimation models and analytical
tools utilized in the ALLL process and/or are qualitatively
considered in evaluating the overall reasonableness of the ALLL.
Large commercial nonaccrual loans, certain consumer loans
(nonguaranteed residential mortgages, residential home equity
products, residential construction, other direct, indirect, and
credit card), and commercial loans whose terms have been
modified in a TDR are reviewed to determine the amount of
specific allowance required in accordance with applicable
accounting guidance. A loan is considered impaired when, based
on current information and events, it is probable that the
Company will be unable to collect all amounts due, including
81
Notes to Consolidated Financial Statements, continued
principal and interest, according to the contractual terms of the
agreement. If necessary, an allowance is established for these
specifically evaluated impaired loans. The specific allowance
established for these loans is based on a thorough analysis of the
most probable source of repayment, including the present value
of the loan’s expected future cash flows, the loan’s estimated
market value, or the estimated fair value of the underlying
collateral, net of estimated selling costs. Any change in the
present value attributable to the passage of time is recognized
through the Provision for credit losses.
General allowances are established for loans and leases
grouped into pools based on similar characteristics. In this
process, general allowance factors are based on an analysis of
historical charge-off experience, expected loss factors derived
from the Company's internal risk rating process, portfolio trends,
and regional and national economic conditions. Other
adjustments may be made to the ALLL after an assessment of
internal and external influences on credit quality that may not be
fully reflected in the historical loss or risk rating data. These
influences may include elements such as changes in credit
underwriting, concentration risk, macroeconomic conditions,
and/or recent observable asset quality trends.
Commercial loans are charged off when they are considered
uncollectible. Losses on unsecured consumer loans are generally
recognized at 120 days past due, except for losses on credit cards,
which are recognized when the loans are 180 days past due, and
losses on guaranteed student loans, which are recognized when
the loans are 270 days past due and payment from the guarantor
is processed by the servicer. However, if the borrower is in
bankruptcy, the loan is charged-off in the month the loan becomes
60 days past due. Losses, as appropriate, on consumer loans
secured by residential real estate, are typically recognized at 120
or 180 days past due, depending on the loan and collateral type,
in compliance with the FFIEC guidelines. However, if the
borrower is in bankruptcy, the secured asset is evaluated once
the loan becomes 60 days past due. The loan value in excess of
the secured asset value is written down or charged-off after the
valuation occurs. Additionally, if a residential loan is discharged
in Chapter 7 bankruptcy and not reaffirmed by the borrower, the
Company's policy is to immediately charge-off the excess of the
carrying amount over the fair value of the collateral.
The Company uses numerous sources of information when
evaluating a property’s value. Estimated collateral valuations are
based on appraisals, broker price opinions, recent sales of
foreclosed properties, automated valuation models, other
property-specific information, and relevant market information,
supplemented by the Company’s internal property valuation
analysis. The value estimate is based on an orderly disposition
of the property, inclusive of marketing costs. In limited instances,
the Company adjusts externally provided appraisals for
justifiable and well-supported reasons, such as an appraiser not
being aware of certain property-specific factors or recent sales
information.
For commercial loans secured by real estate, an acceptable
third party appraisal or other form of evaluation, as permitted by
regulation, is obtained prior to the origination of the loan and
upon a subsequent transaction involving a material change in
terms. In addition, updated valuations may be obtained during
the life of a loan, as appropriate, such as when a loan's
performance materially deteriorates. In situations where an
updated appraisal has not been received or a formal evaluation
performed, the Company monitors factors that can positively or
negatively impact property value, such as the date of the last
valuation, the volatility of property values in specific markets,
changes in the value of similar properties, and changes in the
characteristics of individual properties. Changes in collateral
value affect the ALLL through the risk rating or impaired loan
evaluation process. Charge-offs are recognized when the amount
of the loss is quantifiable and timing is known. The charge-off
is measured based on the difference between the loan’s carrying
value, including deferred fees, and the estimated realizable value
of the property, net of estimated selling costs. When valuing a
property for the purpose of determining a charge-off, a third party
appraisal or an independently derived internal evaluation is
generally employed.
For nonguaranteed mortgage loans secured by residential
real estate where the Company is proceeding with a foreclosure
action, a new valuation is obtained prior to the loan becoming
180 days past due and, if required, the loan is written down to
its realizable value, net of estimated selling costs. In the event
the Company decides not to proceed with a foreclosure action,
the full balance of the loan is charged-off. If a loan remains in
the foreclosure process for 12 months past the original charge-
off, the Company may obtain a new valuation. Any additional
loss based on the new valuation is charged-off. At foreclosure,
a new valuation is obtained and the loan is transferred to OREO
at fair value less estimated selling costs; any loan balance in
excess of the transfer value is charged-off. Estimated declines in
value of the collateral between these formal evaluation events
are captured in the ALLL based on changes in the house price
index in the applicable metropolitan statistical area or other
market information.
In addition to the ALLL, the Company also estimates
probable losses related to unfunded lending commitments, such
as letters of credit and binding unfunded loan commitments.
Unfunded lending commitments are analyzed and segregated by
risk based on the Company’s internal risk rating scale. These risk
classifications, in combination with probability of commitment
usage, existing economic conditions, and any other pertinent
information, result in the estimation of the reserve for unfunded
lending commitments. The Unfunded commitments reserve is
reported in Other liabilities on the Consolidated Balance Sheets
and the provision associated with changes in the Unfunded
commitment reserve is recognized in the Provision for credit
losses in the Consolidated Statements of Income. For additional
information on the Company's allowance for credit loss
activities, see Note 7, “Allowance for Credit Losses.”
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is calculated
predominantly using the straight-line method over the assets’
estimated useful lives. Leasehold improvements are amortized
using the straight-line method over the shorter of the
improvements' estimated useful lives or the lease term.
Construction and software in process includes costs related to
in-process branch expansion, branch renovation, and software
development projects. Upon completion, branch and office
related projects are maintained in premises and equipment while
completed software projects are reclassified to Other assets in
82
Notes to Consolidated Financial Statements, continued
the Consolidated Balance Sheets. Maintenance and repairs are
charged to expense, and improvements that extend the useful life
of an asset are capitalized and depreciated over the remaining
useful life. Premises and equipment are evaluated for impairment
whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. For additional
information on the Company’s premises and equipment
activities, see Note 8, “Premises and Equipment.”
Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price over the fair value
of identifiable net assets of acquired companies. Goodwill is
assigned to reporting units that are expected to benefit from the
synergies of the business combination.
Goodwill is tested at the reporting unit level for impairment,
at least annually as of October 1, or as events and circumstances
change that would more-likely-than-not reduce the fair value of
a reporting unit below its carrying amount.
If, after considering all relevant events and circumstances,
the Company determines it is not more-likely-than-not that the
fair value of a reporting unit is less than its carrying amount, then
performing an impairment test is not necessary. If the Company
elects to bypass the qualitative analysis, or concludes via
qualitative analysis that it is more-likely-than-not that the fair
value of a reporting unit is less than its carrying value, a two-
step goodwill impairment test is performed. In the first step, the
fair value of each reporting unit is compared with its carrying
value. If the fair value is greater than the carrying value, then the
reporting unit's goodwill is deemed not to be impaired. If the fair
value is less than the carrying value, then the second step is
performed, which measures the amount of impairment by
comparing the carrying amount of goodwill to its implied fair
value. If the implied fair value of the goodwill exceeds the
carrying amount, there is no impairment. If the carrying amount
exceeds the implied fair value of the goodwill, an impairment
charge is recorded for the excess.
The Company has identified intangible assets with finite and
indefinite lives. Intangible assets that have finite lives are
amortized over their useful lives and carried at amortized cost.
Intangible assets that have indefinite lives are initially measured
at fair value and are not amortized until the useful life is no longer
considered indefinite. Indefinite-lived intangibles are tested for
impairment at least annually; however, all intangible assets are
evaluated for impairment whenever events or changes in
circumstances indicate it is more likely than not that the asset is
impaired. For additional information on the Company’s activities
related to goodwill and other intangibles, see Note 9, “Goodwill
and Other Intangible Assets.”
Servicing Rights
The Company recognizes as assets the rights to service loans,
either when the loans are sold and the associated servicing rights
are retained or when servicing rights are purchased from a third
party. All servicing rights are initially measured at fair value.
Fair value is determined by projecting net servicing cash
flows, which are then discounted to estimate fair value. The fair
value of servicing rights is impacted by a variety of factors,
including prepayment assumptions, discount rates, delinquency
rates, contractually specified servicing fees, servicing costs, and
underlying
underlying
characteristics. The
portfolio
assumptions and estimated values are corroborated by values
received from independent third parties and comparisons to
market transactions.
The Company has elected to subsequently account for its
residential MSRs under the fair value measurement method and
actively hedges the change in fair value of its residential MSRs.
The Company has elected to subsequently account for all other
servicing rights, which include commercial mortgage and
consumer loan servicing rights, under the amortization method.
Commercial mortgage and consumer loan servicing rights are
amortized in proportion to and over the period of estimated net
servicing income. Servicing rights accounted for under the
amortization method are periodically tested for impairment by
comparing the carrying amount of the servicing rights to the
estimated fair value.
Servicing rights are included in Other intangible assets on
the Consolidated Balance Sheets. For residential MSRs, both
servicing fees, which are recognized when they are received, and
changes in the fair value of MSRs are reported in Mortgage
servicing related income in the Consolidated Statements of
Income. For commercial mortgage servicing rights, servicing
fees, amortization, and any impairment is recognized in
Commercial real estate related income in the Consolidated
Statements of Income. For all other servicing rights, the related
servicing fees, amortization, and any impairment are recognized
in Other noninterest income in the Consolidated Statements of
Income.
For additional information on the Company’s servicing
rights, see Note 9, “Goodwill and Other Intangible Assets.”
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held
for sale and are initially recorded at fair value, less estimated
selling costs. To the extent fair value, less cost to sell, is less than
the loan’s cost basis, the difference is charged to the ALLL at the
date of transfer into OREO. The Company estimates market
values based primarily on appraisals and other market
information. Pursuant to an asset transfer into OREO, the fair
value of the asset, less cost to sell at the date of transfer, becomes
the new cost basis of the asset. Any subsequent changes in value
as well as gains or losses from the disposition on these assets are
reported in Noninterest expense in the Consolidated Statements
of Income. For additional information on the Company's
activities related to OREO, see Note 18, “Fair Value Election
and Measurement.”
Loan Sales and Securitizations
The Company sells and at times may securitize loans and other
financial assets. When the Company securitizes assets, it may
hold a portion of the securities issued, including senior interests,
subordinated and other residual interests, interest-only strips,
and principal-only strips, all of which are considered retained
interests in the transferred assets. Retained securitized interests
are recognized and initially measured at fair value. The interests
in securitized assets held by the Company are typically classified
as either securities AFS or trading assets and are measured at fair
value, which is based on independent, third party market prices,
market prices for similar assets, or discounted cash flow
analyses. If market prices are not available, fair value is
calculated using management’s best estimates of key
83
Notes to Consolidated Financial Statements, continued
assumptions, including credit losses, loan repayment speeds, and
discount rates commensurate with the risks involved.
The Company transfers first lien residential mortgage loans
in conjunction with Ginnie Mae and GSE securitization
transactions, whereby the loans are exchanged for cash or
securities that are readily redeemable for cash and servicing
rights are retained. Net gains/losses on the sale of residential
mortgage LHFS are recorded at inception of the associated
IRLCs and reflect the change in value of the loans resulting from
changes in interest rates from the time the Company enters into
IRLCs with borrowers until the loans are sold, adjusted for pull
through rates and excluding hedge transactions initiated to
mitigate this market risk. Net gains related to the sale of
residential mortgage loans are recorded within Mortgage
production related income in the Consolidated Statements of
Income.
The Company also sells commercial mortgage loans to
Fannie Mae and Freddie Mac and issues and sells Ginnie Mae
commercial MBS backed by FHA insured loans. The loans and
securities are exchanged for cash and servicing rights are
retained. Gains and losses from the sale of these commercial
mortgage loans and securities are recorded within Commercial
real estate related income in the Consolidated Statements of
Income. For additional
the Company’s
securitization activities, see Note 10, “Certain Transfers of
Financial Assets and Variable Interest Entities.”
information on
Income Taxes
The Company's provision for income taxes is based on income
and expense reported for financial statement purposes after
adjustments for permanent differences such as interest income
from lending to tax-exempt entities, tax credits from community
reinvestment activities, and amortization expense related to
qualified affordable housing investment costs. In computing the
provision for income taxes, the Company evaluates the technical
merits of its income tax positions based on current legislative,
judicial, and regulatory guidance. The deferral method of
accounting is used on investments that generate investment tax
credits, such that the investment tax credits are recognized as a
reduction to the related investment. Additionally, the Company
recognizes all excess tax benefits and deficiencies on employee
share-based payments as a component of the Provision for
income taxes in the Consolidated Statements of Income. These
tax effects, generally determined upon the exercise of stock
options or vesting of restricted stock, are treated as discrete items
in the period in which they occur.
DTAs and DTLs result from differences between the timing
of the recognition of assets and liabilities for financial reporting
purposes and for income tax purposes. These deferred assets and
liabilities are measured using the enacted tax rates and laws that
are expected to apply in the periods in which the DTAs or DTLs
are expected to be realized. Subsequent changes in the tax laws
require adjustment to these deferred assets and liabilities with
the cumulative effect included in the Provision for income taxes
for the period in which the change is enacted. A valuation
allowance is recognized for a DTA, if based on the weight of
available evidence, it is more likely than not that some portion
or all of the DTA will not be realized.
Interest and penalties related to the Company’s tax positions
are recognized as a component of the Provision for income taxes
84
in the Consolidated Statements of Income. For additional
information on the Company’s activities related to income taxes,
see Note 14, “Income Taxes.”
Earnings Per Share
Basic EPS is computed by dividing net income available to
common shareholders by the weighted average number of
common shares outstanding during each period. Diluted EPS is
computed by dividing net income available to common
shareholders by the weighted average number of common shares
outstanding during each period, plus common share equivalents
calculated for stock options, warrants, and restricted stock
outstanding using the treasury stock method.
The Company has issued certain restricted stock awards,
which are unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents.
These restricted shares are considered participating securities.
Accordingly, the Company calculated net income available to
common shareholders pursuant to the two-class method,
whereby net income is allocated between common shareholders
and participating securities.
Net income available to common shareholders represents
net income after preferred stock dividends, gains or losses from
any repurchases of preferred stock, and dividends and allocation
of undistributed earnings to the participating securities. For
additional information on the Company’s EPS, see Note 12, “Net
Income Per Common Share.”
Securities Sold Under Agreements to Repurchase and
Securities Borrowed or Purchased Under Agreements to Resell
Securities sold under agreements to repurchase and securities
borrowed or purchased under agreements to resell are accounted
for as collateralized financing transactions and are recorded at
the amounts at which the securities were sold or acquired, plus
accrued interest. The fair value of collateral pledged or received
is continually monitored and additional collateral is obtained or
requested to be returned to the Company as deemed appropriate.
For additional information on the collateral pledged to secure
repurchase agreements, see Note 3, "Federal Funds Sold and
Securities Financing Activities," Note 4, "Trading Assets and
Liabilities and Derivatives," and Note 5, "Securities Available
for Sale."
Guarantees
The Company recognizes a liability at the inception of a
guarantee at an amount equal to the estimated fair value of the
obligation. A guarantee is defined as a contract that contingently
requires a company to make a payment to a guaranteed party
based upon changes in an underlying asset, liability, or equity
security of the guaranteed party, or upon failure of a third party
to perform under a specified agreement. The Company considers
the following arrangements to be guarantees: certain asset
purchase/sale agreements with recourse, standby letters of credit
and financial guarantees, certain indemnification agreements
included within third party contractual arrangements, and certain
derivative contracts. For additional
the
Company’s guarantor obligations, see Note 16, “Guarantees.”
information on
Notes to Consolidated Financial Statements, continued
Derivative Instruments and Hedging Activities
The Company records derivative contracts at fair value in the
Consolidated Balance Sheets. Accounting for changes in the fair
value of a derivative depends upon whether or not it has been
designated in a formal, qualifying hedging relationship.
Changes in the fair value of derivatives not designated in a
hedging relationship are recorded in Noninterest income. This
includes derivatives that the Company enters into in a dealer
capacity to facilitate client transactions and as a risk management
tool to economically hedge certain identified risks, along with
certain IRLCs on residential mortgage and commercial loans that
are a normal part of the Company’s operations. The Company
also evaluates contracts, such as brokered deposits and debt, to
determine whether any embedded derivatives are required to be
bifurcated and separately accounted for as freestanding
derivatives.
of the hedged item. For discontinued cash flow hedges, the
unrealized gains and losses recorded in AOCI would be
reclassified to earnings in the period when the previously
designated hedged cash flows occur unless it was determined
that transaction was probable to not occur, whereby any
unrealized gains and losses in AOCI would be immediately
reclassified to earnings.
It is the Company's policy to offset derivative transactions
with a single counterparty as well as any cash collateral paid to
and received from that counterparty for derivative contracts that
are subject to ISDA or other legally enforceable netting
arrangements and meet accounting guidance for offsetting
treatment. For additional information on the Company’s
derivative activities, see Note 17, “Derivative Financial
Instruments,” and Note 18, “Fair Value Election and
Measurement.”
Certain derivatives used as risk management tools are
designated as accounting hedges of the Company’s exposure to
changes in interest rates or other identified market risks. The
Company prepares written hedge documentation for all
derivatives which are designated as hedges of (1) changes in the
fair value of a recognized asset or liability (fair value hedge)
attributable to a specified risk or (2) a forecasted transaction,
such as the variability of cash flows to be received or paid related
to a recognized asset or liability (cash flow hedge). The written
hedge documentation includes identification of, among other
items, the risk management objective, hedging instrument,
hedged item and methodologies for assessing and measuring
hedge effectiveness and ineffectiveness, along with support for
management’s assertion that the hedge will be highly effective.
Methodologies
and
ineffectiveness are consistent between similar types of hedge
transactions and include (i) statistical regression analysis of
changes in the cash flows of the actual derivative and a perfectly
effective hypothetical derivative, or (ii) statistical regression
analysis of changes in the fair values of the actual derivative and
the hedged item.
effectiveness
related
hedge
to
through
the matching of critical
For designated hedging relationships,
the Company
performs retrospective and prospective effectiveness testing
using quantitative methods and does not assume perfect
effectiveness
terms.
Assessments of hedge effectiveness and measurements of hedge
ineffectiveness are performed at least quarterly. Changes in the
fair value of a derivative that is highly effective and that has been
designated and qualifies as a fair value hedge are recorded in
current period earnings, along with the changes in the fair value
of the hedged item that are attributable to the hedged risk. The
effective portion of the changes in the fair value of a derivative
that is highly effective and that has been designated and qualifies
as a cash flow hedge is initially recorded in AOCI and reclassified
to earnings in the same period that the hedged item impacts
earnings; any ineffective portion is recorded in current period
earnings.
Hedge accounting ceases for hedging relationships that are
no longer deemed effective, or for which the derivative has been
terminated or de-designated. For discontinued fair value hedges
where the hedged item remains outstanding, the hedged item
would cease to be remeasured at fair value attributable to changes
in the hedged risk and any existing basis adjustment would be
recognized as an adjustment to earnings over the remaining life
85
Stock-Based Compensation
The Company sponsors various stock-based compensation plans
under which RSUs, restricted stock, and phantom stock units
may be granted to certain employees. The Company measures
the grant date fair value of the RSUs and restricted stock, which
is expensed over the award's vesting period. For service-based
awards, compensation expense is amortized on a straight-line
basis and recognized in Employee compensation in the
Consolidated Statements of Income. Additionally, the Company
estimates the number of awards for which it is probable that
service will be rendered and adjusts compensation cost
accordingly. Estimated forfeitures are subsequently adjusted to
reflect actual forfeitures. For performance-based awards,
compensation expense is amortized over the vesting period and
recognized in Employee compensation in the Consolidated
Statements of Income. These performance-based awards may be
adjusted based on the estimated outcome of the award's
associated performance conditions, which are based on the
Company's performance and/or its performance relative to its
peers.
The phantom stock units are subject to variable accounting
and grant certain employees the contractual right to receive an
amount in cash equal to the fair market value of a share of
common stock on the specified date set forth in the award
agreement, typically the vesting date. For additional information
on the Company’s stock-based compensation plans, see Note 15,
“Employee Benefit Plans.”
Employee Benefits
Employee benefits expense includes expenses related to (i) net
periodic benefit costs or credits associated with the pension and
other postretirement benefit plans, (ii) contributions under the
defined contribution plans, (iii) the amortization of restricted
stock, (iv) the issuance of phantom stock units, (v) historical
stock option issuances, and (vi) other employee medical and
benefits costs. For additional information on the Company's
employee benefit plans, see Note 15, “Employee Benefit Plans.”
Foreign Currency Transactions
Foreign denominated assets and liabilities resulting from foreign
currency transactions are valued using period end foreign
exchange rates and the associated interest income or expense is
determined using weighted average exchange rates for the
Notes to Consolidated Financial Statements, continued
period. The Company may enter into foreign currency
derivatives to mitigate its exposure to changes in foreign
exchange rates. The derivative contracts are accounted for at fair
value on a recurring basis with any resulting gains and losses
recorded in Noninterest income in the Consolidated Statements
of Income.
Related Party Transactions
The Company periodically enters into transactions with certain
of its executive officers, directors, affiliates, trusts, and/or other
related parties in its ordinary course of business. ASC 850
requires disclosure of material related party transactions, other
than certain compensation and other arrangements entered into
in the normal course of business. The Company has included
information related to its relationships with VIEs and employee
benefit plan arrangements in its Notes to the Consolidated
Financial Statements in this Form 10-K.
Fair Value Measurement
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at
the measurement date.
Depending on the nature of the asset or liability, the Company
uses various valuation techniques and assumptions when
estimating fair value. The Company prioritizes inputs used in
valuation techniques based on the fair value hierarchy discussed
in Note 18, “Fair Value Election and Measurement.”
When measuring assets and liabilities at fair value, the
Company considers the principal or most advantageous market
in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability. Assets
and liabilities that are required to be measured at fair value on a
recurring basis include trading securities, securities AFS, and
derivative instruments. Assets and liabilities that the Company
has elected to measure at fair value on a recurring basis include
certain MSRs, LHFS, LHFI, trading loans, brokered time
deposits, and issuances of fixed rate debt. Other assets and
liabilities are measured at fair value on a non-recurring basis,
such as when assets are evaluated for impairment, the basis of
accounting is LOCOM, or for disclosure purposes. Examples of
these nonrecurring fair value measurements include certain
LHFS and LHFI, OREO, certain cost or equity method
investments, and intangible and long-lived assets. For additional
information on the Company’s valuation of assets and liabilities
held at fair value, see Note 18, “Fair Value Election and
Measurement.”
Recently Issued Accounting Pronouncements
The following table summarizes ASUs issued by the FASB that were not yet adopted (or only partially adopted previously) as of
December 31, 2017, that could have a material effect on the Company's financial statements:
Standard
Description
Required Date
of Adoption
Effect on the Financial Statements or Other
Significant Matters
Standard(s) Not Yet Adopted (or partially adopted previously)
ASU 2016-01,
Recognition and
Measurement of
Financial Assets
and Financial
Liabilities
The ASU amends ASC Topic 825, Financial Instruments-
Overall, and addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial
instruments. The main provisions
require most
investments in equity securities to be measured at fair
value through net income, unless they qualify for a
measurement alternative, and require fair value changes
arising from changes in instrument-specific credit risk for
financial liabilities that are measured under the fair value
option to be recognized in other comprehensive income.
With the exception of disclosure requirements and the
application of the measurement alternative for certain
equity investments that will be adopted prospectively, the
ASU must be adopted on a modified retrospective basis.
January 1, 2018
Early adoption is
permitted
beginning January
1, 2016 or 2017
for the provision
related to changes
in instrument-
specific credit
risk for financial
liabilities under
the FVO.
The Company early adopted the provision related to
changes in instrument-specific credit risk beginning
January 1, 2016, which resulted in an immaterial
cumulative effect adjustment from Retained earnings
to AOCI. See Note 1, “Significant Accounting
Policies,” to the Company's 2016 Annual Report on
Form 10-K for additional information regarding the
early adoption of this provision.
Effective as of January 1, 2018, an immaterial amount
of equity securities previously classified as Securities
AFS were reclassified to Other assets, as the AFS
classification is no longer permitted for equity
securities under this ASU. The remaining provisions
of this ASU did not have a material impact on the
Company's Consolidated Financial Statements and
related disclosures upon adoption. However, for any
investments for which we elect the measurement
alternative, to the extent there is an observable price
change in transactions occurring subsequent to
January 1, 2018 for identical or similar instruments of
the same issuer, these investments will have to be re-
measured through net income based on the observed
transaction price, which may result in a material
impact to the Company's Consolidated Statements of
Income.
86
Notes to Consolidated Financial Statements, continued
Standard
Description
Required Date
of Adoption
Effect on the Financial Statements or Other
Significant Matters
Standard(s) Not Yet Adopted (or partially adopted previously) (continued)
ASU 2016-15,
Statement of Cash
Flows (Topic 230):
Classification of
Certain Cash
Receipts and Cash
Payments
The ASU amends ASC Topic 230, Statement of Cash
Flows, to clarify the classification of certain cash receipts
and payments within the Company's Consolidated
Statements of Cash Flow. These items include: cash
payments for debt prepayment or debt extinguishment
costs; cash outflows for the settlement of zero-coupon
debt instruments or other debt instruments with coupon
interest
insignificant; contingent
consideration payments made after a business
combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned
life insurance policies, including bank-owned life
insurance policies; distributions received from equity
method investees; and beneficial interests acquired in
securitization transactions. The ASU also clarifies that
when no specific U.S. GAAP guidance exists and the
source of the cash flows are not separately identifiable,
the predominant source of cash flow should be used to
determine the classification for the item. The ASU must
be adopted on a retrospective basis.
that are
rates
January 1, 2018
Effective as of January 1, 2018, the adoption date, the
Company will change the presentation of certain cash
payments and receipts within its Consolidated
Statements of Cash Flows. Specifically, the Company
will reclassify approximately $3 million and $17
million of proceeds from the settlement of corporate-
owned life insurance policies, including bank-owned
life insurance policies, from operating activities to
investing activities for the years ended December 31,
2017 and 2016, respectively. The Company will also
reclassify approximately $127 million and $202
million of cash payments related to premiums paid for
corporate-owned life insurance policies, including
bank-owned life insurance policies, from operating
activities to investing activities for the years ended
December 31, 2017 and 2016, respectively. Lastly, for
contingent consideration payments made more than
three months after a business combination, the
Company will reclassify the portion of the cash
payment up to the acquisition date fair value of the
contingent consideration as a financing activity and
any amount paid in excess of the acquisition date fair
value as an operating activity. For the year ended
December 31, 2016, the Company will reclassify
approximately $13 million from investing activities to
financing activities and will reclassify approximately
$10 million from investing activities to operating
activities. For the year ended December 31, 2017, there
were no contingent consideration payments made.
These changes will be reflected for all periods
presented in the Company's Consolidated Statements
of Cash Flows beginning with its first quarter of 2018
Quarterly Report on Form 10-Q.
January 1, 2018
These ASUs comprise ASC Topic 606, Revenue from
Contracts with Customers, which supersedes the revenue
recognition requirements in ASC Topic 605, Revenue
Recognition, and most
industry-specific guidance
throughout the Industry Topics of the ASC. The core
principle of these ASUs is that an entity should recognize
revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. These ASUs may
be adopted either retrospectively or on a modified
retrospective basis to new contracts and existing
contracts, with remaining performance obligations as of
the effective date.
ASU 2014-09,
Revenue from
Contracts with
Customers
ASU 2015-14,
Deferral of the
Effective Date
ASU 2016-08,
Principal versus
Agent
Considerations
ASU 2016-10,
Identifying
Performance
Obligations and
Licensing
ASU 2016-12,
Narrow-Scope
Improvements and
Practical Expedients
ASU 2016-20,
Technical
Corrections and
Improvements to
Topic 606, Revenue
from Contracts with
Customers
87
The
Company
conducted
The Company completed its evaluation of the
anticipated effects that these ASUs will have on its
Consolidated Financial Statements and related
disclosures.
a
comprehensive scoping exercise to determine the
revenue streams that are in the scope of these updates.
Results indicate that certain noninterest income
financial statement line items, including service
charges on deposit accounts, card fees, other charges
and fees, investment banking income, trust and
investment management income, retail investment
services, and other noninterest income, contain
revenue streams that are within the scope of these
updates.
The Company adopted these ASUs on January 1, 2018
using the modified retrospective method of adoption.
The adoption resulted in an immaterial cumulative
effect adjustment to the opening balance of retained
earnings. Additionally, there will be prospective
changes to the presentation of certain types of revenue
and expenses, such as underwriting revenue and
expenses within investment banking income, which
will be shown on a gross basis, and to certain types of
cash promotions and card network expenses, which
will be reclassified from noninterest expense to service
charges on deposit accounts and card
fees,
respectively. The net quantitative impact of these
presentation changes to noninterest income and
noninterest expense is immaterial and will not affect
net income. The Company is in the process of
completing the required quantitative and qualitative
disclosures, which will be included in its first quarter
of 2018 Quarterly Report on Form 10-Q.
Notes to Consolidated Financial Statements, continued
Standard
Description
Standard(s) Not Yet Adopted (or partially adopted previously) (continued)
ASU 2017-09,
Stock
Compensation
(Topic 718): Scope
of Modification
Accounting
This ASU amends ASC Topic 718, Stock Compensation,
to provide guidance about which changes to the terms or
conditions of a share-based payment award require an
entity to apply modification accounting per ASC Topic
718, Stock Compensation. The amendments clarify that
modification accounting only applies to an entity if the
fair value, vesting conditions, or classification of the
award changes as a result of changes in the terms or
conditions of a share-based payment award. The ASU
should be applied prospectively to awards modified on or
after the adoption date.
ASU 2017-12,
Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting for
Hedging Activities
ASU 2018-02,
Income Statement -
Reporting
Comprehensive
Income (Topic 220):
Reclassification of
Certain Tax Effects
from AOCI
ASU 2016-02,
Leases
The ASU amends ASC Topic 815, Derivatives and
Hedging, to simplify the requirements for hedge
accounting. Key amendments include: eliminating the
requirement to separately measure and report hedge
ineffectiveness, requiring changes in the value of the
hedging instrument to be presented in the same income
statement line as the earnings effect of the hedged item,
and the ability to measure the hedged item based on the
benchmark interest rate component of the total contractual
coupon for fair value hedges. These changes expand the
types of risk management strategies eligible for hedge
accounting. The ASU also permits entities to qualitatively
assert that a hedging relationship was and continues to be
highly effective. New incremental disclosures are also
required for reporting periods subsequent to the date of
adoption. All transition requirements and elections should
be applied to hedging relationships existing on the date
of adoption using a modified retrospective approach.
This ASU amends ASC Topic 220, Income Statement -
Reporting Comprehensive Income to allow for a
reclassification from AOCI to Retained earnings for the
stranded tax effects resulting from the 2017 Tax Act. The
amount of the reclassification would be the difference
between the historical federal corporate income tax rate
and the newly enacted 21 percent federal corporate
income tax rate. Consequently, the amendments in this
ASU would eliminate the stranded tax effects resulting
from the change in the federal corporate income tax rate
in the 2017 Tax Act. The Company may apply this ASU
at
the period of adoption or
retrospectively to all periods in which the 2017 Tax Act
is enacted.
the beginning of
The ASU creates ASC Topic 842, Leases, which
supersedes ASC Topic 840, Leases. ASC Topic 842
requires lessees to recognize right-of-use assets and
associated liabilities that arise from leases, with the
exception of short-term leases. The ASU does not make
significant changes to lessor accounting; however, there
were certain improvements made to align lessor
accounting with the lessee accounting model and ASC
Topic 606, Revenue from Contracts with Customers.
There are several new qualitative and quantitative
disclosures required. Upon transition, lessees and lessors
are required to recognize and measure leases at the
beginning of the earliest period presented using a
modified retrospective approach.
Required Date
of Adoption
Effect on the Financial Statements or Other
Significant Matters
January 1, 2018
The Company adopted this ASU on January 1, 2018
and upon adoption, the ASU did not impact the
Company's Consolidated Financial Statements and
related disclosures.
January 1, 2019
Early adoption is
permitted.
The Company early adopted this ASU beginning
January 1, 2018 and modified its measurement
methodology for certain hedged items designated
under fair value hedge relationships. The Company
elected to perform its subsequent assessments of hedge
effectiveness using a qualitative, rather than a
quantitative, approach. The adoption resulted in an
immaterial cumulative effect adjustment to the
opening balance of Retained earnings and a basis
adjustment to the related hedged items. The Company
is in the process of developing the required disclosures,
which will be included in its first quarter 2018
Quarterly Report on Form 10-Q.
January 1, 2019
Early adoption is
permitted.
The Company plans on early adopting this ASU as of
January 1, 2018. Upon adoption of this ASU, the
Company will elect to reclassify approximately $154
million of stranded tax effects relating to securities
AFS, derivative instruments, credit risk on long-term
debt, and employee benefit plans from AOCI to
Retained earnings.
January 1, 2019
Early adoption is
permitted.
The Company has formed a cross-functional team to
oversee the implementation of this ASU. The
Company's implementation efforts are ongoing,
including the review of its lease portfolios and related
lease accounting policies, the review of its service
contracts for embedded leases, and the deployment of
a new lease software solution. The Company's
adoption of this ASU will result in an increase in right-
of-use assets and associated lease liabilities, arising
from operating leases in which the Company is the
lessee, on its Consolidated Balance Sheets.
The amount of the right-of-use assets and associated
lease liabilities recorded upon adoption will be based
primarily on the present value of unpaid future
minimum lease payments, the amount of which will
depend on the population of leases in effect at the date
of adoption. At December 31, 2017, the Company’s
estimate of right-of-use assets and lease liabilities that
would be recorded on its Consolidated Balance Sheets
upon adoption is in excess of $1 billion. The Company
does not expect this ASU to have a material impact on
its Consolidated Statements of Income subsequent to
adoption.
88
Notes to Consolidated Financial Statements, continued
Standard
Description
Standard(s) Not Yet Adopted (or partially adopted previously) (continued)
ASU 2016-13,
Measurement of
Credit Losses on
Financial
Instruments
The ASU adds ASC Topic 326, Financial Instruments-
Credit Losses, to replace the incurred loss impairment
methodology with a current expected credit loss
methodology for financial instruments measured at
amortized cost and other commitments to extend credit.
For this purpose, expected credit losses reflect losses over
the remaining contractual life of an asset, considering the
effect of voluntary prepayments and considering
available information about the collectability of cash
flows, including information about past events, current
conditions, and reasonable and supportable forecasts. The
resulting allowance for credit losses is deducted from the
amortized cost basis of the financial assets to reflect the
net amount expected to be collected on the financial
assets. Additional quantitative and qualitative disclosures
are required upon adoption. The change to the allowance
for credit losses at the time of the adoption will be made
with a cumulative effect adjustment to Retained earnings.
ASU 2017-04,
Intangibles -
Goodwill and Other
(Topic 350):
Simplifying the Test
for Goodwill
Impairment
The current expected credit loss model does not apply to
AFS debt securities; however, the ASU requires entities
to record an allowance when recognizing credit losses for
AFS securities, rather than recording a direct write-down
of the carrying amount.
The ASU amends ASC Topic 350, Intangibles - Goodwill
and Other, to simplify the subsequent measurement of
goodwill, by eliminating Step 2 from the goodwill
impairment test. The amendments require an entity to
perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its
carrying amount. Entities should recognize an impairment
charge for the amount by which a reporting unit's carrying
amount exceeds its fair value, but the loss recognized
should not exceed the total amount of goodwill allocated
to that reporting unit. The ASU must be applied on a
prospective basis.
Required Date
of Adoption
Effect on the Financial Statements or Other
Significant Matters
January 1, 2020
Early adoption is
permitted
beginning January
1, 2019.
The Company has formed a cross-functional team to
oversee the implementation of this ASU and has
identified the changes necessary to its credit loss
estimation methodologies in order to comply with the
new accounting standard requirements. Substantial
progress has been made to date on implementing these
changes, including the development of models,
updates to technology systems, and the documentation
of accounting policy decisions. Additionally, the
Company is evaluating the impact that this ASU will
have on its Consolidated Financial Statements and
related disclosures, and the Company currently
anticipates that an increase to the allowance for credit
losses will be recognized upon adoption to provide for
the expected credit losses over the estimated life of the
financial assets. However, since the magnitude of the
anticipated increase in the allowance for credit losses
will be impacted by economic conditions and trends
in the Company’s portfolio at the time of adoption, the
quantitative
reasonably
impact cannot yet be
estimated.
January 1, 2020
Early adoption is
permitted.
Based on the Company's most recent annual goodwill
impairment test performed as of October 1, 2017, there
were no reporting units for which the carrying amount
of the reporting unit exceeded its fair value; therefore,
this ASU would not currently have an impact on the
Company's Consolidated Financial Statements and
related disclosures. However, if upon adoption the
carrying amount of a reporting unit exceeds its fair
value, the Company would be required to recognize
an impairment charge for the amount that the carrying
value exceeds the fair value.
89
Notes to Consolidated Financial Statements, continued
NOTE 2 - ACQUISITIONS/DISPOSITIONS
During the years ended December 31, 2017, 2016, and 2015, the Company had the following notable acquisition and disposition:
Date
(Dollars in millions)
2017
Sale of PAC
2016
Acquisition of Pillar
1 Does not include $62 million of commercial mortgage servicing rights acquired.
12/15/2016
12/1/2017
Consideration
Received/(Paid)
Goodwill
Other Intangible
Assets
Pre-tax Gain
$261
($197)
($7)
$1
$—
$13 1
$107
$—
Sale of PAC
On December 1, 2017, the Company completed the sale of PAC,
its commercial lines insurance premium finance subsidiary with
$1.3 billion in assets and $1.2 billion in liabilities, to IPFS
Corporation. As a result, the Company received consideration of
$261 million and recognized a pre-tax gain of $107 million in
connection with the sale, net of transaction-related expenses.
The Company's results for the years ended December 31,
2017, 2016, and 2015 included the following related to PAC,
excluding the gain on sale:
(Dollars in millions)
PAC Financial Information:
2017
2016
2015
Revenue
Less: Expenses
Income before provision for income taxes
$56
31
$25
$60
27
$33
$59
22
$37
For all periods presented, the financial results of PAC through
the date of disposition, including the gain on sale, are reflected
in the Company's Wholesale business segment.
Acquisition of Pillar
On December 15, 2016, the Company completed the acquisition
of substantially all of the assets of the operating subsidiaries of
Pillar Financial, LLC, a multi-family agency lending and
servicing company with an originate-to-distribute focus that
holds licenses with Fannie Mae, Freddie Mac, and the FHA. The
acquired assets include Pillar's multi-family lending business,
which is comprised of multi-family affordable housing, health
care properties, senior housing, and manufactured housing
specialty teams. Additionally, the transaction includes Cohen
Financial's commercial real estate investor services business,
which provides loan administration, advisory, and commercial
mortgage brokerage services.
During the second quarter of 2017, the final settlement
amount associated with working capital adjustments was
reached and the purchase consideration of $197 million was
finalized.
There were no other material acquisitions or dispositions during
the three years ended December 31, 2017.
NOTE 3 - FEDERAL FUNDS SOLD AND SECURITIES FINANCING ACTIVITIES
Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell
Fed Funds sold and securities borrowed or purchased under agreements to resell were as follows:
(Dollars in millions)
Fed funds sold
Securities borrowed
Securities purchased under agreements to resell
Total Fed funds sold and securities borrowed or purchased under agreements to resell
December 31, 2017
December 31, 2016
$65
298
1,175
$1,538
$58
270
979
$1,307
Securities purchased under agreements to resell are primarily
collateralized by U.S. government or agency securities and are
carried at the amounts at which the securities will be
subsequently resold, plus accrued interest. Securities borrowed
are primarily collateralized by corporate securities. The
Company borrows securities and purchases securities under
agreements to resell as part of its securities financing activities.
On the acquisition date of these securities, the Company and the
related counterparty agree on the amount of collateral required
to secure the principal amount loaned under these arrangements.
The Company monitors collateral values daily and calls for
additional collateral to be provided as warranted under the
respective agreements. At December 31, 2017 and 2016, the total
market value of collateral held was $1.5 billion and $1.3 billion,
of which $177 million and $246 million was repledged,
respectively.
90
Notes to Consolidated Financial Statements, continued
Securities Sold Under Agreements to Repurchase
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:
(Dollars in millions)
U.S. Treasury securities
Federal agency securities
MBS - agency
CP
Corporate and other debt securities
Total securities sold under agreements to
repurchase
December 31, 2017
December 31, 2016
Overnight
and
Continuous
Up to 30
days
30-90
days
Total
Overnight
and
Continuous
Up to 30
days
30-90
days
Total
$95
101
694
19
316
$—
15
135
—
88
$—
—
—
—
40
$95
116
829
19
444
$27
288
793
49
311
$—
24
51
—
50
$—
—
—
—
40
$27
312
844
49
401
$1,225
$238
$40
$1,503
$1,468
$125
$40
$1,633
For these 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.
Netting of Securities - Repurchase and Resell Agreements
The Company has various financial assets and financial
liabilities that are subject to enforceable master netting
agreements or similar agreements. The Company's derivatives
that are subject to enforceable master netting agreements or
similar agreements are discussed in Note 17, "Derivative
Financial Instruments." The following table presents the
Company's securities borrowed or purchased under agreements
to resell and securities sold under agreements to repurchase that
are subject to MRAs. Generally, MRAs require collateral to
exceed the asset or liability recognized on the balance sheet.
Transactions subject to these agreements are treated as
collateralized financings, and those with a single counterparty
are permitted to be presented net on the Company's Consolidated
Balance Sheets, provided certain criteria are met that permit
balance sheet netting. At December 31, 2017 and 2016, there
were no such transactions subject to legally enforceable MRAs
that were eligible for balance sheet netting.
The following table includes the amount of collateral
pledged or received related to exposures subject to enforceable
MRAs. While these agreements are typically over-collateralized,
the amount of collateral presented in this table is limited to the
amount of the related recognized asset or liability for each
counterparty.
(Dollars in millions)
December 31, 2017
Financial assets:
Gross
Amount
Amount
Offset
Net Amount
Presented in
Consolidated
Balance Sheets
Held/Pledged
Financial
Instruments
Net
Amount
Securities borrowed or purchased under agreements to resell
$1,473
Financial liabilities:
Securities sold under agreements to repurchase
1,503
December 31, 2016
Financial assets:
Securities borrowed or purchased under agreements to resell
$1,249
Financial liabilities:
Securities sold under agreements to repurchase
1,633
$—
—
$—
—
$1,473 1
$1,462
1,503
1,503
$1,249 1
$1,241
1,633
1,633
$11
—
$8
—
1 Excludes $65 million and $58 million of Fed Funds sold, which are not subject to a master netting agreement at December 31, 2017 and 2016, respectively.
91
Notes to Consolidated Financial Statements, continued
NOTE 4 - TRADING ASSETS AND LIABILITIES AND DERIVATIVE INSTRUMENTS
The fair values of the components of trading assets and liabilities and derivative instruments are presented in the following table:
(Dollars in millions)
Trading Assets and Derivative Instruments:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency
CLO securities
Corporate and other debt securities
CP
Equity securities
Derivative instruments 1
Trading loans 2
Total trading assets and derivative instruments
Trading Liabilities and Derivative Instruments:
U.S. Treasury securities
MBS - agency
Corporate and other debt securities
Equity securities
Derivative instruments 1
Total trading liabilities and derivative instruments
December 31, 2017
December 31, 2016
$157
395
61
700
—
655
118
56
802
2,149
$5,093
$577
—
289
9
408
$1,283
$539
480
134
567
1
656
140
49
984
2,517
$6,067
$697
1
255
—
398
$1,351
1 Amounts include the impact of offsetting cash collateral received from and paid to the same derivative counterparties, and the impact of netting derivative assets
and derivative liabilities when a legally enforceable master netting agreement or similar agreement exists.
2 Includes loans related to TRS.
Various trading and derivative instruments are used as part of
the Company’s overall balance sheet management strategies and
to support client requirements executed through the Bank and/
or STRH, a broker/dealer subsidiary of the Company. The
Company manages the potential market volatility associated
with trading instruments by using appropriate risk management
strategies. The size, volume, and nature of the trading products
and derivative instruments can vary based on economic
conditions as well as client-specific and Company-specific asset
or liability positions.
Product offerings to clients include debt securities, loans
traded in the secondary market, equity securities, derivative
contracts, and other similar financial instruments. Other trading-
related activities include acting as a market maker for certain
debt and equity security transactions, derivative instrument
transactions, and foreign exchange transactions. The Company
also uses derivatives to manage its interest rate and market risk
from non-trading activities. The Company has policies and
procedures to manage market risk associated with client trading
and non-trading activities, and assumes a limited degree of
market risk by managing the size and nature of its exposure. For
valuation assumptions and additional information related to the
Company's trading products and derivative instruments, see Note
17, “Derivative Financial Instruments,” and the “Trading Assets
and Derivative Instruments and Securities Available for Sale”
section of Note 18, “Fair Value Election and Measurement.”
Pledged trading assets are presented in the following table:
(Dollars in millions)
Pledged trading assets to secure repurchase agreements 1
Pledged trading assets to secure certain derivative agreements
Pledged trading assets to secure other arrangements
December 31, 2017
December 31, 2016
$1,016
72
41
$968
471
40
1 Repurchase agreements secured by collateral totaled $975 million and $928 million at December 31, 2017 and 2016, respectively.
92
Notes to Consolidated Financial Statements, continued
NOTE 5 – SECURITIES AVAILABLE FOR SALE
Securities Portfolio Composition
(Dollars in millions)
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities 1
Total securities AFS
(Dollars in millions)
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities 1
Total securities AFS
December 31, 2017
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$4,361
257
618
22,616
2,121
55
862
6
17
472
$2
3
7
222
3
4
7
2
—
—
$32
1
8
134
38
—
3
—
—
3
$4,331
259
617
22,704
2,086
59
866
8
17
469
$31,385
$250
$219
$31,416
December 31, 2016
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$5,486
310
279
22,379
1,263
71
257
8
34
642
$5
5
5
311
2
3
—
2
1
1
$86
2
5
254
39
—
5
—
—
1
$5,405
313
279
22,436
1,226
74
252
10
35
642
$30,729
$335
$392
$30,672
1 At December 31, 2017, the fair value of other equity securities was comprised of the following: $15 million of FHLB of Atlanta stock, $403 million of Federal
Reserve Bank of Atlanta stock, $49 million of mutual fund investments, and $2 million of other.
At December 31, 2016, the fair value of other equity securities was comprised of the following: $132 million of FHLB of Atlanta stock, $402 million of Federal
Reserve Bank of Atlanta stock, $102 million of mutual fund investments, and $6 million of other.
The following table presents interest and dividends on securities AFS:
(Dollars in millions)
Taxable interest
Tax-exempt interest
Dividends
Total interest and dividends on securities AFS
Year Ended December 31
2016
2017
2015
$743
13
18
$774
$630
6
15
$651
$552
6
35
$593
93
Notes to Consolidated Financial Statements, continued
Securities AFS pledged to secure public deposits, repurchase
agreements, trusts, certain derivative agreements, and other
funds had a fair value of $4.3 billion and $2.0 billion at December
31, 2017 and 2016, respectively.
The following table presents the amortized cost, fair value,
and weighted average yield of investments in debt securities AFS
at December 31, 2017, by remaining contractual maturity, with
the exception of MBS and ABS, which are based on estimated
average life. Receipt of cash flows may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
(Dollars in millions)
Amortized Cost:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Distribution of Remaining Maturities
Due in 1 Year
or Less
Due After 1
Year through 5
Years
Due After 5
Years through
10 Years
Due After 10
Years
Total
$—
121
6
2,686
—
—
—
—
7
$2,322
46
49
7,937
315
55
12
6
10
$2,039
4
149
11,781
1,547
—
813
—
—
$—
86
414
212
259
—
37
—
—
$4,361
257
618
22,616
2,121
55
862
6
17
Total debt securities AFS
$2,820
$10,752
$16,333
$1,008
$30,913
Fair Value:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
$—
123
6
2,748
—
—
—
—
7
$2,305
47
52
7,980
308
59
12
8
10
$2,026
4
153
11,763
1,525
—
816
—
—
$—
85
406
213
253
—
38
—
—
$4,331
259
617
22,704
2,086
59
866
8
17
Total debt securities AFS
$2,884
$10,781
$16,287
Weighted average yield 1
3.36%
2.34%
2.81%
$995
3.23%
$30,947
2.71%
1 Weighted average yields are based on amortized cost and presented on an FTE basis.
94
Notes to Consolidated Financial Statements, continued
Securities AFS in an Unrealized Loss Position
The Company held certain investment securities AFS where
amortized cost exceeded fair value, resulting in unrealized loss
positions. Market changes in interest rates and credit spreads
may result in temporary unrealized losses as the market prices
of securities fluctuate. At December 31, 2017, 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 reviewed
its portfolio for OTTI in accordance with the accounting policies
described in Note 1, "Significant Accounting Policies."
Securities AFS in an unrealized loss position at period end are presented in the following tables:
(Dollars in millions)
Temporarily impaired securities AFS:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities
Total temporarily impaired securities AFS
OTTI securities AFS 1:
ABS
Total OTTI securities AFS
Total impaired securities AFS
Less than twelve months
Fair
Value
Unrealized
Losses 2
December 31, 2017
Twelve months or longer
Unrealized
Losses 2
Fair
Value
Total
Fair
Value
Unrealized
Losses 2
$1,993
23
267
8,095
887
134
—
10
—
11,409
—
—
$11,409
$12
—
3
38
9
1
—
—
—
63
—
—
$63
$841
60
114
4,708
915
93
4
—
2
6,737
1
1
$6,738
$20
1
5
96
29
2
—
—
3
156
—
—
$156
$2,834
83
381
12,803
1,802
227
4
10
2
18,146
1
1
$18,147
$32
1
8
134
38
3
—
—
3
219
—
—
$219
1 OTTI securities AFS are impaired securities for which OTTI credit losses have been previously recognized in earnings.
2 Unrealized losses less than $0.5 million are presented as zero within the table.
(Dollars in millions)
Temporarily impaired securities AFS:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities
Total temporarily impaired securities AFS
OTTI securities AFS 1:
MBS - non-agency residential
ABS
Total OTTI securities AFS
Total impaired securities AFS
Less than twelve months
December 31, 2016
Twelve months or longer
Total
Fair
Value
Unrealized
Losses 2
Fair
Value
Unrealized
Losses 2
Fair
Value
Unrealized
Losses 2
$4,380
96
149
13,505
1,117
184
—
12
—
19,443
16
—
16
$19,459
$86
2
5
247
38
5
—
—
—
383
—
—
—
$383
$—
3
—
436
15
—
5
—
4
463
—
1
1
$464
$—
—
—
7
1
—
—
—
1
9
—
—
—
$9
$4,380
99
149
13,941
1,132
184
5
12
4
19,906
16
1
17
$19,923
$86
2
5
254
39
5
—
—
1
392
—
—
—
$392
1 OTTI securities AFS are impaired securities for which OTTI credit losses have been previously recognized in earnings.
2 Unrealized losses less than $0.5 million are presented as zero within the table.
At December 31, 2017, temporarily impaired securities AFS that
have been in an unrealized loss position for twelve months or
longer included residential and commercial agency MBS, U.S.
Treasury securities, municipal securities, commercial non-
agency MBS, federal agency securities, one ABS collateralized
by 2004 vintage home equity loans, and one equity security.
Unrealized losses on temporarily impaired securities were due
to market interest rates being higher than the securities' stated
coupon rates. Unrealized losses on securities AFS that relate to
factors other than credit are recorded in AOCI, net of tax.
95
Notes to Consolidated Financial Statements, continued
Realized Gains and Losses and Other-Than-Temporarily
Impaired Securities AFS
result in unrealized gains relating to factors other than credit
recorded in AOCI, net of tax.
During the years ended December 31, 2017, 2016, and 2015,
credit impairment losses recognized on securities AFS held at
the end of each period were immaterial. The accumulated balance
of OTTI credit losses recognized in earnings on securities AFS
held at period end was $23 million, $23 million, and $25 million
at December 31, 2017, 2016, and 2015, respectively. Subsequent
credit losses may be recorded on securities without a
corresponding further decline in fair value when there has been
a decline in expected cash flows.
The following table presents a summary of the significant
inputs used in determining the measurement of OTTI credit
losses recognized in earnings for non-agency MBS for the years
ended December 31:
Default rate
Prepayment rate
2017 1
3%
19%
2016 2
N/A
N/A
2015 1
9%
13%
41%
Loss severity
1 OTTI credit losses recognized in earnings relate to one non-agency MBS with
a fair value of $12 million and $20 million at December 31, 2017 and 2015,
respectively.
2 "N/A" - Not applicable as there were no OTTI credit losses recognized in
earnings for the year ended December 31, 2016.
56%
N/A
Significant inputs represent lifetime average estimates of each
security for which credit losses were recognized in earnings.
Inputs may vary from period to period as the securities for which
credit losses are recognized vary. Additionally, severity may vary
widely when losses are few and large.
(Dollars in millions)
Gross realized gains
Gross realized losses
OTTI credit losses recognized in
earnings
Net securities (losses)/gains
Year Ended December 31
2017
2016
2015
$3
(110)
(1)
($108)
$4
—
—
$4
$25
(3)
(1)
$21
Securities AFS in an unrealized loss position are evaluated
quarterly for other-than-temporary credit impairment, which is
determined using cash flow analyses that take into account
security specific collateral and transaction structure. Future
expected credit losses are determined using various assumptions,
the most significant of which include default rates, prepayment
rates, and loss severities. If, based on this analysis, a security is
in an unrealized loss position and 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. Credit
losses on the OTTI security are recognized in earnings and reflect
the difference between the present value of cash flows expected
to be collected and the amortized cost basis of the security. See
Note 1, "Significant Accounting Policies," for additional
information regarding the Company's policy on securities AFS
and related impairments.
The Company seeks to reduce existing exposure on OTTI
securities primarily through paydowns. In certain instances, the
amount of credit losses recognized in earnings on a debt security
exceeds the total unrealized losses on the security, which may
96
Notes to Consolidated Financial Statements, continued
NOTE 6 - LOANS
Composition of Loan Portfolio
(Dollars in millions)
Commercial loans:
C&I 1
CRE
Commercial construction
Total commercial loans
Consumer loans:
Residential mortgages -
guaranteed
Residential mortgages -
nonguaranteed 2
Residential home equity
products
Residential construction
Guaranteed student
Other direct
Indirect
Credit cards
Total consumer loans
December 31,
2017
December 31,
2016
$66,356
5,317
3,804
75,477
560
27,136
10,626
298
6,633
8,729
12,140
1,582
67,704
$69,213
4,996
4,015
78,224
537
26,137
11,912
404
6,167
7,771
10,736
1,410
65,074
$2,290
$143,298
$143,181
LHFI
LHFS 3
1 Includes $3.7 billion of lease financing at both December 31, 2017 and 2016,
and $778 million and $729 million of installment loans at December 31, 2017
and 2016, respectively.
2 Includes $196 million and $222 million of LHFI measured at fair value at
December 31, 2017 and 2016, respectively.
3 Includes $1.6 billion and $3.5 billion of LHFS measured at fair value at
December 31, 2017 and 2016, respectively.
$4,169
During the years ended December 31, 2017 and 2016, the
Company transferred $288 million and $360 million of LHFI to
LHFS, and transferred $19 million and $30 million of LHFS to
LHFI, respectively. In addition to sales of residential and
commercial mortgage LHFS in the normal course of business,
the Company sold $705 million and $1.6 billion of loans and
leases for an immaterial net gain and a net gain of $6 million
during the years ended December 31, 2017 and 2016,
respectively.
During the year ended December 31, 2017, the Company
purchased $1.7 billion of guaranteed student loans and $233
million of consumer indirect loans, and during the year ended
December 31, 2016, the Company purchased $2.2 billion of
guaranteed student loans.
At December 31, 2017 and 2016, the Company had $24.3
billion and $22.6 billion of net eligible loan collateral pledged
to the Federal Reserve discount window to support $18.2 billion
and $17.0 billion of available, unused borrowing capacity,
respectively.
At December 31, 2017 and 2016, the Company had $38.0
billion and $36.9 billion of net eligible loan collateral pledged
to the FHLB of Atlanta to support $30.5 billion and $31.9 billion
of available borrowing capacity, respectively. The available
FHLB borrowing capacity at December 31, 2017 was used to
support $4 million of long-term debt and $6.7 billion of letters
of credit issued on the Company's behalf. At December 31, 2016,
the available FHLB borrowing capacity was used to support $2.8
billion of long-term debt and $7.3 billion of letters of credit issued
on the Company's behalf.
Credit Quality Evaluation
The Company evaluates the credit quality of its loan portfolio
by employing a dual internal risk rating system, which assigns
both PD and LGD ratings to derive expected losses. Assignment
of these ratings are predicated upon numerous factors, including
consumer credit risk scores, rating agency information,
borrower/guarantor financial capacity, LTV ratios, collateral
type, debt service coverage ratios, collection experience, other
internal metrics/analyses, and/or qualitative assessments.
For the commercial portfolio, the Company believes that
the most appropriate credit quality indicator is an individual
loan’s risk assessment expressed according to the broad
regulatory agency classifications of Pass or Criticized. The
Company conforms to the following regulatory classifications
for Criticized assets: Other Assets Especially Mentioned (or
Special Mention), Adversely Classified, Doubtful, and Loss.
However, for the purposes of disclosure, management believes
the most meaningful distinction within the Criticized categories
is between Criticized accruing (which includes Special Mention
and a portion of Adversely Classified) and Criticized
nonaccruing (which includes a portion of Adversely Classified
and Doubtful and Loss). This distinction identifies those
relatively higher risk loans for which there is a basis to believe
that the Company will not collect all amounts due under those
loan agreements. The Company's risk rating system is more
granular, with multiple risk ratings in both the Pass and Criticized
categories. Pass ratings reflect relatively low PDs, whereas,
Criticized assets have higher PDs. The granularity in Pass ratings
assists in establishing pricing, loan structures, approval
requirements, reserves, and ongoing credit management
requirements. Commercial risk ratings are refreshed at least
annually, or more frequently as appropriate, based upon
considerations
conditions, borrower
as market
characteristics, and portfolio trends. Additionally, management
routinely
trends, and
concentrations to support risk identification and mitigation
activities.
reviews portfolio
ratings,
such
risk
For consumer loans, the Company monitors credit risk based
on indicators such as delinquencies and FICO scores. The
Company believes that consumer credit risk, as assessed by the
industry-wide FICO scoring method, is a relevant credit quality
indicator. Borrower-specific FICO scores are obtained at
origination as part of the Company’s formal underwriting
process, and refreshed FICO scores are obtained by the Company
at least quarterly.
For guaranteed loans, the Company monitors the credit
quality based primarily on delinquency status, as it is a more
relevant indicator of credit quality due to the government
guarantee. At December 31, 2017 and 2016, 28% and 29%,
respectively, of guaranteed residential mortgages were current
with respect to payments. At both December 31, 2017 and 2016,
75% of guaranteed student loans were current with respect to
payments. The Company's loss exposure on guaranteed
residential mortgages and student loans is mitigated by the
government guarantee.
97
Notes to Consolidated Financial Statements, continued
LHFI by credit quality indicator are presented in the following tables:
(Dollars in millions)
Risk rating:
Pass
Criticized accruing
Criticized nonaccruing
Total
C&I
Commercial Loans
CRE
Commercial Construction
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$64,546
$66,961
$5,126
$4,574
$3,770
$3,914
1,595
215
1,862
390
167
24
415
7
33
1
84
17
$66,356
$69,213
$5,317
$4,996
$3,804
$4,015
Residential Mortgages -
Nonguaranteed
Consumer Loans 1
Residential
Home Equity Products
Residential Construction
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$23,602
$22,194
2,721
813
3,042
901
$27,136
$26,137
$8,946
1,242
438
$10,626
$9,826
1,540
546
$11,912
$240
50
8
$298
$292
96
16
$404
Other Direct
Indirect
Credit Cards
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$7,929
$7,008
757
43
$8,729
703
60
$7,771
$9,094
2,344
702
$12,140
$7,642
2,381
713
$10,736
$1,088
395
99
$1,582
$974
351
85
$1,410
(Dollars in millions)
Current FICO score range:
700 and above
620 - 699
Below 620 2
Total
(Dollars in millions)
Current FICO score range:
700 and above
620 - 699
Below 620 2
Total
1 Excludes $6.6 billion and $6.2 billion of guaranteed student loans and $560 million and $537 million of guaranteed residential mortgages at December 31, 2017
and 2016, respectively, for which there was nominal risk of principal loss due to the government guarantee.
2 For substantially all loans with refreshed FICO scores below 620, the borrower’s FICO score at the time of origination exceeded 620 but has since deteriorated as
the loan has seasoned.
98
Notes to Consolidated Financial Statements, continued
The LHFI portfolio by payment status is presented in the following tables:
(Dollars in millions)
Commercial loans:
C&I
CRE
Commercial construction
Total commercial loans
Consumer loans:
Accruing
30-89 Days
Past Due
December 31, 2017
Accruing
90+ Days
Past Due
Nonaccruing 2
Total
$42
—
—
42
$7
—
—
7
$215
24
1
240
$66,356
5,317
3,804
75,477
Accruing
Current
$66,092
5,293
3,803
75,188
Residential mortgages - guaranteed
Residential mortgages - nonguaranteed 1
Residential home equity products
Residential construction
Guaranteed student
Other direct
Indirect
Credit cards
55
148
75
7
659
36
111
13
1,104
$1,146
Total LHFI
1 Includes $196 million of loans measured at fair value, the majority of which were accruing current.
2 Nonaccruing loans past due 90 days or more totaled $357 million. Nonaccruing loans past due fewer than 90 days include nonaccrual loans modified in TDRs,
performing second lien loans where the first lien loan is nonperforming, and certain energy-related commercial loans.
560
27,136
10,626
298
6,633
8,729
12,140
1,582
67,704
$143,181
159
26,778
10,348
280
4,946
8,679
12,022
1,556
64,768
$139,956
346
4
—
—
1,028
7
—
13
1,398
$1,405
—
206
203
11
—
7
7
—
434
$674
Total consumer loans
(Dollars in millions)
Commercial loans:
C&I
CRE
Commercial construction
Total commercial loans
Consumer loans:
Accruing
Current
$68,776
4,988
3,998
77,762
Accruing
30-89 Days
Past Due
December 31, 2016
Accruing
90+ Days
Past Due
Nonaccruing 2
Total
$35
1
—
36
$12
—
—
12
$390
7
17
414
$69,213
4,996
4,015
78,224
Residential mortgages - guaranteed
Residential mortgages - nonguaranteed 1
Residential home equity products
Residential construction
Guaranteed student
Other direct
Indirect
Credit cards
55
84
81
3
603
35
126
12
999
Total LHFI
$1,035
1 Includes $222 million of loans measured at fair value, the majority of which were accruing current.
2 Nonaccruing loans past due 90 days or more totaled $360 million. Nonaccruing loans past due fewer than 90 days include nonaccrual loans modified in TDRs,
performing second lien loans where the first lien loan is nonperforming, and certain energy-related commercial loans.
537
26,137
11,912
404
6,167
7,771
10,736
1,410
65,074
$143,298
155
25,869
11,596
389
4,637
7,726
10,608
1,388
62,368
$140,130
327
7
—
—
927
4
1
10
1,276
$1,288
—
177
235
12
—
6
1
—
431
$845
Total consumer loans
99
Notes to Consolidated Financial Statements, continued
Impaired Loans
A loan is considered impaired when it is probable that the
Company will be unable to collect all amounts due, including
principal and interest, according to the contractual terms of the
agreement. Commercial nonaccrual loans greater than $3 million
and certain commercial and consumer loans whose terms have
been modified in a TDR are individually evaluated for
impairment. Smaller-balance homogeneous loans that are
collectively evaluated for impairment and loans measured at fair
value are not included in the following tables. Additionally, the
following
loans and
tables exclude guaranteed student
guaranteed residential mortgages for which there was nominal
risk of principal loss due to the government guarantee.
(Dollars in millions)
Impaired LHFI with no ALLL recorded:
Commercial loans:
C&I
Total commercial loans with no ALLL recorded
Consumer loans:
Residential mortgages - nonguaranteed
Residential construction
Total consumer loans with no ALLL recorded
Impaired LHFI with an ALLL recorded:
Commercial loans:
C&I
CRE
Total commercial loans with an ALLL recorded
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Other direct
Indirect
Credit cards
Total consumer loans with an ALLL recorded
December 31, 2017
December 31, 2016
Unpaid
Principal
Balance
Carrying
Value 1
Related
ALLL
Unpaid
Principal
Balance
Carrying
Value 1
Related
ALLL
$38
38
458
15
473
127
21
148
1,133
953
93
59
123
26
2,387
$35
35
363
9
372
117
21
138
1,103
895
90
59
122
7
2,276
$—
—
—
—
—
19
2
21
113
54
7
1
7
1
183
$266
266
466
16
482
225
26
251
1,277
863
109
59
103
24
2,435
2
$214
214
360
8
368
151
17
168
1,248
795
107
59
103
6
2,318
2
$—
—
—
—
—
31
2
33
150
54
11
1
5
1
222
Total impaired LHFI
$3,046
$2,821
$204
$3,434
$3,068
$255
1 Carrying value reflects charge-offs that have been recognized plus other amounts that have been applied to adjust the net book balance.
2 Includes $41 million of TDRs that were modified prior to 2016 and reclassified as TDRs in the fourth quarter of 2016.
Included in the impaired LHFI carrying values above at December 31, 2017 and 2016 were $2.4 billion and $2.5 billion of accruing
TDRs, of which 96% and 97% were current, respectively. See Note 1, “Significant Accounting Policies,” for further information
regarding the Company’s loan impairment policy.
100
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Impaired LHFI with no ALLL recorded:
Commercial loans:
C&I
CRE
Total commercial loans with no ALLL recorded
Consumer loans:
Residential mortgages - nonguaranteed
Residential construction
Total consumer loans with no ALLL recorded
Impaired LHFI with an ALLL recorded:
Commercial loans:
C&I
CRE
Total commercial loans with an ALLL recorded
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Other direct
Indirect
Credit cards
Total consumer loans with an ALLL recorded
Total impaired LHFI
Year Ended December 31
2017
2016
2015
Average
Carrying
Value
Interest
Income
Recognized1
Average
Carrying
Value
Interest
Income
Recognized1
Average
Carrying
Value
Interest
Income
Recognized 1
$34
—
34
357
8
365
112
22
134
1,123
914
94
60
136
6
2,333
$2,866
$1
—
1
15
—
15
2
1
3
58
32
5
4
6
1
106
$125
$169
—
169
370
8
378
170
25
195
1,251
812
110
10
114
6
2,303
$3,045
$3
—
3
16
—
16
1
1
2
64
29
6
1
6
1
107
$128
$58
10
68
390
11
401
147
—
147
1,349
682
125
12
125
7
2,300
$2,916
$2
—
2
17
—
17
5
—
5
65
28
8
—
6
1
108
$132
1 Of the interest income recognized during the years ended December 31, 2017, 2016, and 2015, cash basis interest income was $4 million, $4 million, and $7 million,
respectively.
101
Notes to Consolidated Financial Statements, continued
NPAs are presented in the following table:
(Dollars in millions)
Nonaccrual loans/NPLs:
Commercial loans:
C&I
CRE
Commercial construction
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Other direct
Indirect
Total nonaccrual loans/NPLs 1
OREO 2
Other repossessed assets
Total NPAs
December 31, 2017
December 31, 2016
$215
24
1
206
203
11
7
7
674
57
10
$741
$390
7
17
177
235
12
6
1
845
60
14
$919
1 Nonaccruing restructured loans are included in total nonaccrual loans/NPLs.
2 Does not include foreclosed real estate related to loans insured by the FHA or guaranteed by the VA. Proceeds due from the FHA and the VA are recorded as a
receivable in Other assets in the Consolidated Balance Sheets until the property is conveyed and the funds are received. The receivable related to proceeds due from
the FHA and the VA totaled $45 million and $50 million at December 31, 2017 and 2016, respectively.
The Company's recorded investment of nonaccruing loans
secured by residential real estate properties for which formal
foreclosure proceedings were in process at December 31, 2017
and 2016 was $73 million and $85 million, respectively. The
Company's recorded investment of accruing loans secured by
residential real estate properties for which formal foreclosure
proceedings were in process at December 31, 2017 and 2016 was
$101 million and $122 million, of which $97 million and $114
million were insured by the FHA or guaranteed by the VA,
respectively.
At December 31, 2017, OREO included $51 million of
foreclosed residential real estate properties and $4 million of
foreclosed commercial real estate properties, with the remaining
$2 million related to land.
At December 31, 2016, OREO included $50 million of
foreclosed residential real estate properties and $7 million of
foreclosed commercial real estate properties, with the remaining
$3 million related to land.
102
Notes to Consolidated Financial Statements, continued
Restructured Loans
A TDR is a loan for which the Company has granted an economic
concession to a borrower in response to certain instances of
financial difficulty experienced by the borrower, which the
Company would not have considered otherwise. When a loan is
modified under the terms of a TDR, the Company typically offers
the borrower an extension of the loan maturity date and/or a
reduction in the original contractual interest rate. In limited
situations, the Company may offer to restructure a loan in a
(Dollars in millions)
Commercial loans:
C&I
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Other direct
Indirect
Credit cards
Total TDR additions
manner that ultimately results in the forgiveness of a
contractually specified principal balance.
At December 31, 2017 and 2016, the Company had $2
million and $29 million, respectively, of commitments to lend
additional funds to debtors whose terms have been modified in
a TDR. The number and carrying value of loans modified under
the terms of a TDR, by type of modification, are presented in the
following tables:
Number of
Loans
Modified
Year Ended December 31, 2017 1
Term Extension
and/or Other
Concessions
Rate
Modification
Total
178
150
2,488
661
2,740
919
7,136
$3
22
45
—
—
4
$74
$43
10
176
9
61
—
$299
$46
32
221
9
61
4
$373
1 Includes loans modified under the terms of a TDR that were charged-off during the period.
(Dollars in millions)
Commercial loans:
C&I
Commercial construction
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Other direct 2
Indirect
Credit cards
Total TDR additions
Number of
Loans
Modified
Year Ended December 31, 2016 1
Term Extension
and/or Other
Concessions
Rate
Modification
Total
84
1
397
2,611
1
3,925
1,539
720
9,278
$2
—
79
9
—
—
—
3
$93
$68
—
12
227
—
50
32
—
$389
$70
—
91
236
—
50
32
3
$482
1 Includes loans modified under the terms of a TDR that were charged-off during the period.
2 Includes 3,321 loans with a carrying value of $41 million that were modified prior to 2016 and reclassified as TDRs in the fourth quarter of 2016.
103
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Commercial loans:
C&I
CRE
Commercial construction
Consumer loans:
Residential mortgages - nonguaranteed
Residential home equity products
Residential construction
Other direct
Indirect
Credit cards
Total TDR additions
Number of
Loans
Modified
Year Ended December 31, 2015 1
Term Extension
and/or Other
Concessions
Rate
Modification
Total
57
2
1
737
1,888
4
54
2,299
557
5,599
$1
—
—
125
24
5
—
—
2
$157
$3
—
—
34
108
—
1
47
—
$193
$4
—
—
159
132
5
1
47
2
$350
1 Includes loans modified under the terms of a TDR that were charged-off during the period.
mortgage commitments outstanding, respectively. At both
December 31, 2017 and December 31, 2016, 1% of the
Company's residential real estate secured LHFI were insured by
the FHA or guaranteed by the VA, respectively.
The following table presents residential mortgage LHFI that
included a high original LTV ratio (in excess of 80%), an interest
only feature, and/or a second lien position that may increase the
Company's exposure to credit risk and/or result in a concentration
of credit risk. At December 31, 2017 and 2016, the current
weighted average FICO score for the borrowers of these
residential mortgage LHFI was 756 and 751, respectively.
(Dollars in millions)
December 31,
2017
December 31,
2016
Interest only mortgages with MI or with
combined original LTV
80% 1
Interest only mortgages with no MI and
with combined original LTV > 80% 1
Total interest only mortgages 1
Amortizing mortgages with combined
original LTV > 80% and/or second liens 2
Total mortgages with potential
concentration of credit risk
$569
77
646
10,197
$845
279
1,124
9,198
$10,843
$10,322
1 Comprised of first and/or second liens, primarily with an initial 10 year interest
only period.
2 Comprised of loans with no MI.
TDRs that defaulted during the years ended December 31, 2017,
2016, and 2015, which were first modified within the previous
12 months, were immaterial. The majority of loans that were
modified under the terms of a TDR and subsequently became 90
days or more delinquent have remained on nonaccrual status
since the time of delinquency.
Concentrations of Credit Risk
The Company does not have a significant concentration of credit
risk to any individual client except for the U.S. government and
its agencies. However, a geographic concentration arises because
the Company operates primarily within Florida, Georgia,
Virginia, Maryland, and North Carolina. The Company engages
in limited international banking activities. The Company’s total
cross-border outstanding loans were $1.4 billion and $2.2 billion
at December 31, 2017 and 2016, respectively.
With respect to collateral concentration, the Company's
recorded investment in residential real estate secured LHFI
totaled $38.6 billion at December 31, 2017 and represented 27%
of total LHFI. At December 31, 2016, the Company's recorded
investment in residential real estate secured LHFI totaled $39.0
billion and represented 27% of total LHFI. Additionally, at
December 31, 2017 and 2016, the Company had $10.1 billion
and $10.3 billion in commitments to extend credit on home
equity lines and $3.0 billion and $4.2 billion in residential
104
Notes to Consolidated Financial Statements, continued
NOTE 7 - ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses consists of the ALLL and the unfunded commitments reserve. Activity in the allowance for credit
losses is summarized in the following table:
(Dollars in millions)
Balance, beginning of period
Provision for loan losses
Provision for unfunded commitments
Loan charge-offs
Loan recoveries
Other 1
Balance, end of period
Components:
ALLL
Unfunded commitments reserve 2
Allowance for credit losses
Year Ended December 31
2016
2017
2015
$1,776
397
12
(491)
124
(4)
$1,814
$1,735
79
$1,814
$1,815
440
4
(591)
108
—
$1,776
$1,709
67
$1,776
$1,991
156
9
(470)
129
—
$1,815
$1,752
63
$1,815
1 Related to loans disposed in connection with the sale of PAC. For additional information regarding the sale of PAC, see Note 2, "Acquisitions/Dispositions."
2 The unfunded commitments reserve is recorded in Other liabilities in the Consolidated Balance Sheets.
Activity in the ALLL by loan segment is presented in the following tables:
(Dollars in millions)
Balance, beginning of period
Provision for loan losses
Loan charge-offs
Loan recoveries
Other 1
Balance, end of period
(Dollars in millions)
Balance, beginning of period
Provision for loan losses
Loan charge-offs
Loan recoveries
Balance, end of period
Year Ended December 31, 2017
Commercial
Loans
Consumer
Loans
$1,124
108
(167)
40
(4)
$1,101
$585
289
(324)
84
—
$634
Total
$1,709
397
(491)
124
(4)
$1,735
Year Ended December 31, 2016
Commercial
Loans
Consumer
Loans
Total
$1,047
329
(287)
35
$1,124
$705
111
(304)
73
$585
$1,752
440
(591)
108
$1,709
1 Related to loans disposed in connection with the sale of PAC. For additional information regarding the sale of PAC, see Note 2, "Acquisitions/Dispositions."
As discussed in Note 1, “Significant Accounting Policies,” the
ALLL is composed of both specific allowances for certain
nonaccrual loans and TDRs, and general allowances for groups
of loans with similar risk characteristics. No allowance is
required for loans measured at fair value. Additionally, the
Company records an immaterial allowance for loan products that
are insured by federal agencies or guaranteed by GSEs, as there
is nominal risk of principal loss.
105
Notes to Consolidated Financial Statements, continued
The Company’s LHFI portfolio and related ALLL is presented in the following tables:
(Dollars in millions)
LHFI evaluated for impairment:
Individually evaluated
Collectively evaluated
Total evaluated
LHFI measured at fair value
Total LHFI
(Dollars in millions)
LHFI evaluated for impairment:
Individually evaluated
Collectively evaluated
Total evaluated
LHFI measured at fair value
Total LHFI
Commercial Loans
December 31, 2017
Consumer Loans
Total
Carrying
Value
Related
ALLL
Carrying
Value
Related
ALLL
Carrying
Value
Related
ALLL
$173
75,304
75,477
—
$21
1,080
1,101
—
$2,648
64,860
67,508
196
$183
451
634
—
$2,821
140,164
142,985
196
$204
1,531
1,735
—
$75,477
$1,101
$67,704
$634
$143,181
$1,735
December 31, 2016
Commercial Loans
Consumer Loans
Total
Carrying
Value
Related
ALLL
Carrying
Value
Related
ALLL
Carrying
Value
Related
ALLL
$382
77,842
78,224
—
$33
1,091
1,124
—
$2,686
62,166
64,852
222
$222
363
585
—
$3,068
140,008
143,076
222
$255
1,454
1,709
—
$78,224
$1,124
$65,074
$585
$143,298
$1,709
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the
following:
(Dollars in millions)
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Construction in progress
Total premises and equipment
Useful Life
(in years)
Indefinite
1 - 40
1 - 30
1 - 20
Less: Accumulated depreciation and amortization
2017
2016
$321
1,047
691
1,430
488
3,977
2,243
$320
1,028
645
1,492
357
3,842
2,286
Premises and equipment, net
$1,734
$1,556
in
indebtedness (included
None of the Company's premises and equipment was subject to
long-term debt) at
mortgage
December 31, 2017 and 2016. Capital leases included in net
premises and equipment was immaterial at both December 31,
2017 and 2016. Aggregate rent expense (principally for offices),
including any contingent rent expense and sublease income,
totaled $201 million, $202 million, and $200 million for the years
ended December 31, 2017, 2016, and 2015, respectively.
Depreciation and amortization expense on premises and
equipment for the years ended December 31, 2017, 2016, and
2015 totaled $175 million, $179 million, and $175 million,
respectively.
The Company previously completed sale-leaseback
transactions consisting of branch properties and various
individual office buildings. Upon completion of
these
transactions, the Company recognized a portion of the resulting
106
gains and deferred the remainder to be recognized ratably over
the expected term of the lease, predominantly 10 years, as an
offset to net occupancy expense. To the extent that terms on these
leases are extended, the remaining deferred gain would be
amortized over the new lease term. Amortization of deferred
gains on sale-leaseback transactions was $17 million, $43
million, and $54 million for the years ended December 31, 2017,
2016, and 2015, respectively. At December 31, 2017 and 2016,
the remaining deferred gain associated with sale-leaseback
transactions was $49 million and $67 million, respectively.
The Company has various obligations under capital leases
and noncancelable operating leases for premises and equipment.
The leases predominantly expire over the next 21 years, with the
longest lease term having an expiration date in 2081. Many of
these leases include a renewal option and some provide for
periodic adjustment of rentals based on changes in various
economic indicators.
The following table presents future minimum payments
under noncancelable operating leases, net of sublease rentals,
with initial terms in excess of one year at December 31, 2017.
(Dollars in millions)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Operating
Leases
$205
199
179
167
151
657
$1,558
Notes to Consolidated Financial Statements, continued
NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
As discussed in Note 20, "Business Segment Reporting," the
Company realigned its business segment structure from three
segments to two segments in the second quarter of 2017. As a
result, the Company reassessed the composition of its goodwill
reporting units and combined the Consumer Banking and Private
Wealth Management reporting unit and Mortgage Banking
reporting unit into a single Consumer goodwill reporting unit.
The Mortgage Banking reporting unit did not have any associated
goodwill prior to this change. The composition of the Wholesale
Banking reporting unit was not impacted by the business segment
structure realignment.
The Company conducts a goodwill impairment test at the
reporting unit level at least annually, or more frequently as events
occur or circumstances change that would more-likely-than-not
reduce the fair value of a reporting unit below its carrying
amount. See Note 1, "Significant Accounting Policies," for
additional information regarding the Company's goodwill
accounting policy.
The Company performed goodwill impairment analyses for
its Wholesale and Consumer reporting units as of October 1,
2017, 2016, and 2015. Based on the results of the impairment
analyses, the Company concluded that the fair values of the
reporting units exceed their respective carrying values; therefore,
there was no goodwill impairment. The Company monitored
events and circumstances during the fourth quarter of 2017 and
did not observe any factors that would more-likely-than-not
reduce the fair value of a reporting unit below its respective
carrying value.
Changes in the carrying amount of goodwill by reportable
segment for the year ended December 31, 2017 are presented in
the following table. There were no material changes in the
carrying amount of goodwill by reportable segment for the year
ended December 31, 2016.
(Dollars in millions)
Balance, January 1, 2017
Measurement period adjustment related to the acquisition of Pillar
Sale of PAC
Balance, December 31, 2017
Consumer
Wholesale
Total
$4,262
$2,075
$6,337
—
—
1
(7)
1
(7)
$4,262
$2,069
$6,331
107
Notes to Consolidated Financial Statements, continued
Other Intangible Assets
Changes in the carrying amounts of other intangible assets for the years ended December 31 are presented in the following table:
(Dollars in millions)
Balance, January 1, 2017
Amortization 1
Servicing rights originated
Changes in fair value:
Due to changes in inputs and assumptions 2
Other changes in fair value 3
Servicing rights sold
Other 4
Balance, December 31, 2017
Balance, January 1, 2016
Amortization 1
Servicing rights originated
Servicing rights purchased
Servicing rights acquired in Pillar acquisition
Other intangible assets acquired in Pillar acquisition 5
Changes in fair value:
Due to changes in inputs and assumptions 2
Other changes in fair value 3
Servicing rights sold
Balance, December 31, 2016
Residential
MSRs -
Fair Value
Commercial
Mortgage
Servicing Rights
and Other
Total
$1,572
—
394
(22)
(226)
(8)
—
$1,710
$1,307
—
312
200
—
—
(13)
(232)
(2)
$1,572
$85
(20)
17
—
—
—
(1)
$81
$18
(9)
—
—
62
14
—
—
—
$85
$1,657
(20)
411
(22)
(226)
(8)
(1)
$1,791
$1,325
(9)
312
200
62
14
(13)
(232)
(2)
$1,657
1 Does not include expense associated with non-qualified community development investments. See Note 10, "Certain Transfers of Financial Assets and Variable
Interest Entities," for additional information.
2 Primarily reflects changes in option adjusted spreads and prepayment speed assumptions, due to changes in interest rates.
3 Represents changes due to the collection of expected cash flows, net of accretion due to the passage of time.
4 Represents the first quarter of 2017 measurement period adjustment on other intangible assets acquired previously in the Pillar acquisition.
5 The majority of other intangible assets acquired from Pillar relate to indefinite-lived agency licenses.
The gross carrying amount and accumulated amortization of other intangible assets are presented in the following table:
(Dollars in millions)
Amortized other intangible assets 1:
Commercial mortgage servicing rights
Other (definite-lived)
Unamortized other intangible assets:
Residential MSRs (carried at fair value)
Other (indefinite-lived)
Total other intangible assets
1 Excludes fully amortized other intangible assets.
December 31, 2017
December 31, 2016
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
$79
32
1,710
12
$1,833
($14)
(28)
—
—
$65
4
1,710
12
($42)
$1,791
$62
35
1,572
10
$1,679
$—
(22)
—
—
$62
13
1,572
10
($22)
$1,657
108
Notes to Consolidated Financial Statements, continued
The Company's estimated future amortization of intangible
assets at December 31, 2017 is presented in the following table:
(Dollars in millions)
2018
2019
2020
2021
2022
Thereafter
Total 1
$13
10
9
8
6
23
$69
1 Does not include indefinite-lived intangible assets of $12 million.
Servicing Rights
The Company acquires servicing rights and retains servicing
rights for certain of its sales or securitizations of residential
mortgages and commercial
loans. MSRs on residential
mortgages and servicing rights on commercial mortgages are the
only material servicing assets capitalized by the Company and
are classified as Other intangible assets on the Company's
Consolidated Balance Sheets.
Residential Mortgage Servicing Rights
Income earned by the Company on its residential MSRs is
derived primarily from contractually specified mortgage
servicing fees and late fees, net of curtailment costs. Such income
earned for the years ended December 31, 2017, 2016, and 2015
totaled $403 million, $366 million, and $347 million,
respectively. These amounts are reported in Mortgage servicing
related income in the Consolidated Statements of Income.
At December 31, 2017 and 2016, the total UPB of residential
mortgage loans serviced was $165.5 billion and $160.2 billion,
respectively. Included in these amounts at December 31, 2017
and 2016 were $136.1 billion and $129.6 billion, respectively,
of loans serviced for third parties. The Company purchased
MSRs on residential loans with a UPB of $19.7 billion during
the year ended December 31, 2016. No MSRs on residential loans
were purchased during the year ended December 31, 2017.
During the years ended December 31, 2017 and 2016, the
Company sold MSRs on residential loans, at a price
approximating their fair value, with a UPB of $1.1 billion and
$575 million, respectively.
The Company measures the fair value of its residential
MSRs using a valuation model that calculates the present value
of estimated future net servicing income using prepayment
projections, spreads, and other assumptions. The Consumer
Valuation Committee reviews and approves all significant
assumption changes at least quarterly, evaluating these inputs
compared to various market and empirical data sources. Changes
to valuation model inputs are reflected in the periods' results. See
Note 18, “Fair Value Election and Measurement,” for further
information regarding the Company's residential MSR valuation
methodology.
A summary of the key inputs used to estimate the fair value
of the Company’s residential MSRs at December 31, 2017 and
2016, and the sensitivity of the fair values to immediate 10% and
20% adverse changes in those inputs, are presented in the
following table.
109
(Dollars in millions)
Fair value of residential MSRs
Prepayment rate assumption (annual)
Decline in fair value from 10%
adverse change
Decline in fair value from 20%
adverse change
Option adjusted spread (annual)
Decline in fair value from 10%
adverse change
Decline in fair value from 20%
adverse change
Weighted-average life (in years)
Weighted-average coupon
December 31,
2017
December 31,
2016
$1,710
13%
$85
160
4%
$47
90
5.4
3.9%
$1,572
9%
$50
97
8%
$63
122
7.0
4.0%
These residential MSR sensitivities are hypothetical and should
be used with caution. Changes in fair value based on variations
in assumptions generally cannot be extrapolated because (i) the
relationship of the change in an assumption to the change in fair
value may not be linear and (ii) changes in one assumption may
result in changes in another, which might magnify or counteract
the sensitivities. The sensitivities do not reflect the effect of
hedging activity undertaken by the Company to offset changes
in the fair value of MSRs. See Note 17, “Derivative Financial
Instruments,” for further information regarding these hedging
activities.
Commercial Mortgage Servicing Rights
In December 2016, the Company completed the acquisition of
substantially all of the assets of the operating subsidiaries of
Pillar, and as a result, the Company recognized a $62 million
servicing asset.
Income earned by the Company on its commercial mortgage
servicing rights is derived primarily from contractually specified
servicing fees and other ancillary fees. Such income earned for
the year ended December 31, 2017 totaled $22 million and is
reported in Commercial real estate related income in the
Consolidated Statements of Income. Income earned on
commercial mortgage servicing rights for the year ended
December 31, 2016 was immaterial and there was no such
income earned for the year ended December 31, 2015.
The Company also earns income from subservicing certain
third party commercial mortgages for which the Company does
not record servicing rights. Such income earned for the year
ended December 31, 2017 totaled $14 million and is reported in
Commercial real estate related income in the Consolidated
Statements of Income. Income earned from such subservicing
arrangements for the year ended December 31, 2016 was
immaterial and there was no such income earned for the year
ended December 31, 2015.
At December 31, 2017 and 2016, the total UPB of
commercial mortgage loans serviced for third parties was $30.1
billion and $27.7 billion, respectively. Included in these amounts
at December 31, 2017 and 2016 were $5.8 billion and $4.8
billion, respectively, of loans serviced for third parties for which
the Company records servicing rights, and $24.3 billion and
$22.9 billion, respectively, of loans subserviced for third parties
for which the Company does not record servicing rights. No
commercial mortgage servicing rights were purchased or sold
Notes to Consolidated Financial Statements, continued
during the years ended December 31, 2017 and 2016 (other than
those that were acquired as part of the Pillar acquisition).
Commercial mortgage servicing rights are accounted for at
amortized cost and are monitored for impairment on an ongoing
basis. The Company calculates the fair value of commercial
servicing rights based on the present value of estimated future
net servicing income, considering prepayment projections and
other assumptions. Impairment, if any, is recognized when the
carrying value of the servicing asset exceeds the fair value at the
measurement date. The amortized cost of the Company's
commercial mortgage servicing rights were $65 million and $62
million at December 31, 2017 and December 31, 2016,
respectively.
A summary of the key inputs used to estimate the fair value
of the Company’s commercial mortgage servicing rights are
presented in the following table.
(Dollars in millions)
Fair value of commercial mortgage
servicing rights
Discount rate (annual)
Prepayment rate assumption (annual)
Float earnings rate (annual)
Weighted-average life (in years)
December 31,
2017
December 31,
2016
$75
12%
7
1.1
7.0
$62
12%
6
0.5
7.0
NOTE 10 - CERTAIN TRANSFERS OF FINANCIAL ASSETS AND VARIABLE INTEREST ENTITIES
The Company has transferred loans and securities in sale or
securitization transactions for which the Company retains certain
beneficial interests, servicing rights, and/or recourse. These
transfers of financial assets include certain residential mortgage
loans, guaranteed student loans, and commercial and corporate
loans, as discussed in the following section, "Transfers of
Financial Assets." Cash receipts on beneficial interests held
related to these transfers were $11 million, $12 million and $19
million for the years ended December 31, 2017, 2016, and 2015,
respectively. The servicing fees related to these asset transfers
(excluding servicing fees for residential and commercial
mortgage loan transfers to GSEs, which are discussed in Note 9,
“Goodwill and Other Intangible Assets”) were immaterial for
each of the years ended December 31, 2017, 2016, and 2015.
When a transfer or other transaction occurs with a VIE, the
Company first determines whether it has a VI in the VIE. A VI
is typically in the form of securities representing retained
interests in transferred assets and, at times, servicing rights, and
for commercial mortgage loans sold to Fannie Mae, the loss share
guarantee. When determining whether to consolidate the VIE,
the Company evaluates whether it is a primary beneficiary which
has both (i) the power to direct the activities that most
significantly impact the economic performance of the VIE, and
(ii) the obligation to absorb losses, or the right to receive benefits,
that could potentially be significant to the VIE.
To determine whether a transfer should be accounted for as
a sale or a secured borrowing, the Company evaluates whether:
(i) the transferred assets are legally isolated, (ii) the transferee
has the right to pledge or exchange the transferred assets, and
(iii) the Company has relinquished effective control of the
transferred assets. If all three conditions are met, then the transfer
is accounted for as a sale.
Except as specifically noted herein, the Company is not
required to provide additional financial support to any of the
entities to which the Company has transferred financial assets,
nor has the Company provided any support it was not otherwise
obligated to provide. No events occurred during the year ended
December 31, 2017 that changed the Company’s previous
conclusions regarding whether it is the primary beneficiary of
the VIEs described herein. Furthermore, no events occurred
during the year ended December 31, 2017 that changed the
to previously
Company’s sale conclusion with regards
110
transferred residential mortgage loans, guaranteed student loans,
or commercial and corporate loans.
Transfers of Financial Assets
The following discussion summarizes transfers of financial
assets to entities for which the Company has retained some level
of continuing involvement.
Consumer Loans
Residential Mortgage Loans
The Company typically transfers first lien residential mortgage
loans in conjunction with Ginnie Mae, Fannie Mae, and Freddie
Mac securitization
loans are
exchanged for cash or securities that are readily redeemable for
cash, and servicing rights are retained.
transactions, whereby
the
The Company sold residential mortgage loans to Ginnie
Mae, Fannie Mae, and Freddie Mac, which resulted in pre-tax
net gains of $213 million, $331 million, and $232 million for the
years ended December 31, 2017, 2016, and 2015, respectively.
Net gains/losses on the sale of residential mortgage LHFS are
recorded at inception of the associated IRLCs and reflect the
change in value of the loans resulting from changes in interest
rates from the time the Company enters into the related IRLCs
with borrowers until the loans are sold, but do not include the
results of hedging activities initiated by the Company to mitigate
this market risk. See Note 17, "Derivative Financial
Instruments," for further discussion of the Company's hedging
activities. The Company has made certain representations and
warranties with respect to the transfer of these loans. See Note
16, “Guarantees,”
regarding
representations and warranties.
for additional
information
In a limited number of securitizations, the Company has
received securities in addition to cash in exchange for the
transferred loans, while also retaining servicing rights. The
securities received are measured at fair value and classified as
securities AFS. At December 31, 2017 and 2016, the fair value
of securities received totaled $22 million and $30 million,
respectively.
The Company evaluates securitization entities in which it
has a VI for potential consolidation under the VIE consolidation
model. Notwithstanding the Company's role as servicer, the
Notes to Consolidated Financial Statements, continued
Company typically does not have power over the securitization
entities as a result of rights held by the master servicer. In certain
transactions, the Company does have power as the servicer, but
does not have an obligation to absorb losses, or the right to receive
benefits, that could potentially be significant. In all such cases,
the Company does not consolidate the securitization entity. Total
assets of the unconsolidated entities in which the Company has
a VI were $147 million and $203 million at December 31, 2017
and 2016, respectively.
The Company’s maximum exposure to loss related to these
unconsolidated residential mortgage loan securitizations is
comprised of the loss of value of any interests it retains, which
was $22 million and $30 million at December 31, 2017 and 2016,
respectively, and any repurchase obligations or other losses it
incurs as a result of any guarantees related to these
securitizations, which is discussed further in Note 16,
“Guarantees.”
Guaranteed Student Loans
The Company has securitized government-guaranteed student
loans through a transfer of loans to a securitization entity and
retained the residual interest in the entity. The Company
concluded that this entity should be consolidated because the
Company has (i) the power to direct the activities that most
significantly impact the economic performance of the VIE and
(ii) the obligation to absorb losses, and the right to receive
benefits, that could potentially be significant. At December 31,
2017 and 2016, the Company’s Consolidated Balance Sheets
reflected $192 million and $225 million of assets held by the
securitization entity and $189 million and $222 million of debt
issued by the entity, respectively, inclusive of related accrued
interest.
To the extent that the securitization entity incurs losses on
its assets, the securitization entity has recourse to the guarantor
of the underlying loan, which is backed by the Department of
Education up to a maximum guarantee of 98%, or in the event
of death, disability, or bankruptcy, 100%. When not fully
guaranteed, losses reduce the amount of available cash payable
to the Company as the owner of the residual interest. To the extent
that losses result from a breach of servicing responsibilities, the
Company, which functions as the master servicer, may be
required to repurchase the defaulted loan(s) at par value. If the
breach was caused by the subservicer, the Company would seek
reimbursement from the subservicer up to the guaranteed
amount. The Company’s maximum exposure to loss related to
the securitization entity would arise from a breach of its servicing
responsibilities. To date, loss claims filed with the guarantor that
have been denied due to servicing errors have either been, or are
in the process of, being cured, or reimbursement has been
provided to the Company by the subservicer, or in limited cases,
absorbed by the Company.
Commercial and Corporate Loans
In connection with the Pillar acquisition completed in December
2016, the Company acquired licenses and approvals to originate
and sell certain commercial mortgage loans to Fannie Mae and
Freddie Mac, to originate FHA insured loans, and to issue and
sell Ginnie Mae commercial MBS secured by FHA insured loans.
The Company transferred commercial loans to these Agencies
and GSEs, which resulted in pre-tax net gains of $37 million for
the year ended December 31, 2017. No associated gains or losses
were recognized for the year ended December 31, 2016. The
loans are exchanged for cash or securities that are readily
redeemable for cash, with servicing rights retained. The
Company has made certain representations and warranties with
respect to the transfer of these loans and has entered into a loss
share guarantee related to certain loans transferred to Fannie
Mae. See Note 16, “Guarantees,” for additional information
regarding the commercial mortgage loan loss share guarantee.
The Company's total managed loans, including the LHFI portfolio and other transferred loans (securitized and unsecuritized), are
presented in the following table by portfolio balance and delinquency status (accruing loans 90 days or more past due and all nonaccrual
loans) at December 31, 2017 and 2016, as well as the related net charge-offs for the years ended December 31, 2017 and 2016.
(Dollars in millions)
LHFI portfolio:
Commercial
Consumer
Total LHFI portfolio
Managed securitized loans 1:
Commercial 2
Consumer
Total managed securitized loans
Managed unsecuritized loans 4
Portfolio Balance
Past Due and Nonaccrual
Net Charge-offs
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Year Ended December 31
2017
2016
$75,477
67,704
143,181
5,760
134,160
139,920
2,200
$78,224
65,074
143,298
4,761
127,153
131,914
2,985
$247
1,832
2,079
—
171
171
340
$426
1,707
2,133
—
115
115
438
$127
240
367
—
8 3
8
—
$252
231
483
—
11 3
11
—
Total managed loans
$285,301
$278,197
$2,590
$2,686
$375
$494
1 Excludes loans that have completed the foreclosure or short sale process (i.e., involuntary prepayments).
2 Comprised of commercial mortgages sold through Fannie Mae, Freddie Mac, and Ginnie Mae securitizations, whereby servicing has been retained by the Company.
3 Amounts associated with $602 million and $922 million of managed securitized loans at December 31, 2017 and 2016, respectively. Net charge-off data is not
reported to the Company for the remaining balance of $133.6 billion and $126.2 billion of managed securitized loans at December 31, 2017 and 2016, respectively.
4 Comprised of unsecuritized loans the Company originated and sold to private investors with servicing rights retained. Net charge-offs on these loans are not presented
in the table as the data is not reported to the Company by the private investors that own these related loans.
111
Notes to Consolidated Financial Statements, continued
Other Variable Interest Entities
In addition to exposure to VIEs arising from transfers of financial
assets, the Company also has involvement with VIEs from other
business activities.
Total Return Swaps
The Company facilitates matched book TRS transactions on
behalf of clients, whereby a VIE purchases reference assets
identified by a client and the Company enters into a TRS with
the VIE, with a mirror-image TRS facing the client. The TRS
contract between the VIE and the Company hedges the
Company's exposure to the TRS contract with its third party
client. The Company provides senior financing to the VIE, in the
form of demand notes to fund the purchase of the reference assets.
The TRS contracts pass through interest and other cash flows on
the reference assets to the third party clients, along with exposing
those clients to decreases in value on the assets and providing
them with the rights to appreciation on the assets. The terms of
the TRS contracts require the third parties to post initial margin
collateral, in addition to ongoing margin as the fair values of the
underlying reference assets change.
The Company evaluated the related VIEs for consolidation,
noting that the Company and its third party clients are VI holders.
The Company evaluated the nature of all VIs and other interests
and involvement with the VIEs, in addition to the purpose and
design of the VIEs, relative to the risks they were designed to
create. The VIEs were designed for the benefit of the third parties
and would not exist if the Company did not enter into the TRS
contracts on their behalf. The activities of the VIEs are restricted
to buying and selling the reference assets and the risks/benefits
of any such assets owned by the VIEs are passed to the third
party clients via the TRS contracts. The Company determined
that it is not the primary beneficiary of the VIEs, as the design
of its matched book TRS business results in the Company having
no substantive power to direct the significant activities of the
VIEs, and therefore, the VIEs are not consolidated.
At December 31, 2017 and 2016, the outstanding notional
amounts of the Company's VIE-facing TRS contracts were $1.7
billion and $2.1 billion, and related senior financing outstanding
to VIEs were $1.7 billion and $2.1 billion, respectively. These
financings were measured at fair value and classified within
Trading assets and derivative instruments on the Consolidated
Balance Sheets. The Company entered into client-facing TRS
contracts of the same outstanding notional amounts. The notional
amounts of the TRS contracts with VIEs represent the
Company’s maximum exposure to loss, although this exposure
has been mitigated via the TRS contracts with third party clients.
For additional information on the Company’s TRS contracts and
its involvement with these VIEs, see Note 17, “Derivative
Financial Instruments.”
Community Development Investments
As part of its community reinvestment initiatives, the Company
invests in multi-family affordable housing developments and
other community development entities as a limited partner and/
or a debt provider. The Company receives tax credits for its
limited partner investments. The Company has determined that
the majority of the related partnerships are VIEs.
The Company has concluded that it is not the primary
beneficiary of affordable housing partnerships when it invests
as a limited partner and there is a third party general partner. The
investments are accounted for in accordance with the accounting
guidance for investments in affordable housing projects. The
general partner, or an affiliate of the general partner, often
provides guarantees to the limited partner, which protects the
Company from construction and operating losses and tax credit
allocation deficits. Assets of $2.3 billion and $1.7 billion in these
and other community development partnerships were not
included in the Consolidated Balance Sheets at December 31,
2017 and 2016, respectively. The Company's limited partner
interests had carrying values of $1.1 billion and $780 million at
December 31, 2017 and 2016, respectively, and are recorded in
Other assets on the Company’s Consolidated Balance Sheets.
The Company’s maximum exposure to loss for these investments
totaled $1.4 billion and $1.1 billion at December 31, 2017 and
2016, respectively. The Company’s maximum exposure to loss
would result from the loss of its limited partner investments, net
of liabilities, along with $350 million and $306 million of loans,
interest-rate swap fair value exposures, or letters of credit issued
by the Company to the entities at December 31, 2017 and 2016,
respectively. The remaining exposure to loss is primarily
attributable to unfunded equity commitments that the Company
is required to fund if certain conditions are met.
The Company also owns noncontrolling interests in funds
whose purpose is to invest in community developments. At
December 31, 2017 and 2016, the Company's investment in these
funds totaled $278 million and $200 million, respectively. The
Company's maximum exposure to loss on its investment in these
funds is comprised of its equity investments in the funds, loans
issued, and any additional unfunded equity commitments, which
totaled $643 million and $562 million at December 31, 2017 and
2016, respectively.
During the years ended December 31, 2017, 2016, and 2015,
the Company recognized $108 million, $92 million, and 68
million of tax credits for qualified affordable housing projects,
and $109 million, $87 million, and $66 million of amortization
on these qualified affordable housing projects, respectively.
These tax credits and amortization, net of the related tax benefits,
are recorded in the Provision for income taxes.
Certain of
the Company's community development
investments do not qualify as affordable housing projects for
accounting purposes. The Company recognized tax credits for
these investments of $90 million, $64 million, and $53 million
during the years ended December 31, 2017, 2016, and 2015,
respectively, in the Provision for income taxes. Amortization
recognized on these investments totaled $70 million, $46
million, and $35 million during the years ended December 31,
2017, 2016, and 2015, respectively, recorded in Amortization in
the Company's Consolidated Statements of Income.
112
Notes to Consolidated Financial Statements, continued
NOTE 11 - BORROWINGS AND CONTRACTUAL COMMITMENTS
Short-term Borrowings
Short-term borrowings at December 31 consisted of the following:
(Dollars in millions)
Funds purchased
Securities sold under agreements to repurchase
Other short-term borrowings
Total short-term borrowings
2017
2016
Balance
Interest Rate
Balance
Interest Rate
$2,561
1,503
717
$4,781
1.33%
1.39
1.00
$2,116
1,633
1,015
$4,764
0.55%
0.55
0.56
Long-term Debt
Long-term debt at December 31 consisted of the following:
(Dollars in millions)
Parent Company Only:
Senior, fixed rate
Senior, variable rate
Subordinated, fixed rate
Junior subordinated, variable rate
Total
Less: Debt issuance costs
Total Parent Company debt
Subsidiaries 1:
Senior, fixed rate 2
Senior, variable rate
Subordinated, fixed rate
Total
Less: Debt issuance costs
Total subsidiaries debt
Total long-term debt 3
Maturity Date(s)
Interest Rate(s)
Balance
2017
2016
Balance
2018 - 2028
2018 - 2019
2026
2027 - 2028
2.35% - 6.00%
0.25 - 1.53
6.00
2.09 - 2.32
2018 - 2057
2020 - 2043
2018 - 2026
0.80 - 9.10
1.04 - 1.84
3.30 - 7.25
$3,379
267
200
628
4,474
8
4,466
3,609
512
1,206
5,327
8
5,319
$3,818
314
200
627
4,959
9
4,950
2,539
2,613
1,651
6,803
5
6,798
$9,785
$11,748
1 77% and 88% of total subsidiary debt was issued by the Bank as of December 31, 2017 and 2016, respectively.
2 Includes leases and other obligations that do not have a stated interest rate.
3 Includes $530 million and $963 million of long-term debt measured at fair value at December 31, 2017 and 2016, respectively.
The Company had no foreign denominated debt outstanding at
December 31, 2017 or 2016. Maturities of long-term debt at
December 31, 2017 were as follows:
(Dollars in millions)
2018
2019
2020
2021
2022
Thereafter
Total maturities
Less: Debt issuance costs
Total long-term debt
Parent
Company
$874
792
—
965
990
853
4,474
8
$4,466
Subsidiaries
$361
27
1,508
4
1,022
2,405
5,327
8
$5,319
113
During 2017, the Bank (i) issued $1.0 billion of 3-year fixed rate
senior notes, (ii) issued $300 million of 3-year floating rate senior
notes, and (iii) issued $1.0 billion of 5-year fixed rate senior notes
under its Global Bank Note program. Additionally, $2.8 billion
of the Company's long-term FHLB advances were terminated or
matured during the year. Furthermore, $1.5 billion of senior notes
and $188 million of subordinated notes matured during 2017.
The Company had no additional material issuances, advances,
repurchases, terminations, or extinguishments of long-term debt
during the year.
Restrictive provisions of several long-term debt agreements
prevent the Company from creating liens on, disposing of, or
issuing (except to related parties) voting stock of subsidiaries.
Furthermore, there are restrictions on mergers, consolidations,
certain leases, sales or transfers of assets, minimum shareholders’
equity, and maximum borrowings by the Company. At
Notes to Consolidated Financial Statements, continued
December 31, 2017, the Company was in compliance with all
covenants and provisions of long-term debt agreements.
As currently defined by federal bank regulators, long-term
debt of $1.6 billion and $1.7 billion qualified as Tier 2 capital at
December 31, 2017 and 2016, respectively. See Note 13,
"Capital," for additional information regarding regulatory capital
adequacy requirements for the Company and the Bank.
The Company does not consolidate certain wholly-owned
trusts which were formed for the sole purpose of issuing trust
preferred securities. The proceeds from the trust preferred
securities issuances were invested in junior subordinated
debentures of the Parent Company. The obligations of these
debentures constitute a full and unconditional guarantee by the
Parent Company of the trust preferred securities.
Contractual Commitments
In the normal course of business, the Company enters into certain
contractual commitments. These commitments
include
obligations to make future payments on the Company's
borrowings, partnership investments, and lease arrangements, as
well as commitments to lend to clients and to fund capital
expenditures and service contracts.
The following table presents the Company's significant
contractual commitments at December 31, 2017, except for
long-term debt and short-term borrowings, operating leases, and
pension and other postretirement benefit plans. Information on
those obligations is included above, in Note 8, "Premises and
Equipment," and in Note 15, "Employee Benefit Plans." Capital
lease obligations were immaterial at December 31, 2017 and are
not presented in the table.
(Dollars in millions)
2018
2019
2020
2021
2022
Thereafter
Total
Payments Due by Period
76
278
260
4,720
$9,648
$15,879
$13,380
$13,773
$25,265
Unfunded lending commitments
Purchase obligations 1
Consumer and other time deposits 2, 3
Brokered time deposits 3
Commitments to fund partnership investments 4
1 For legally binding purchase obligations of $5 million or more, amounts include either termination fees under the associated contracts when early termination
provisions exist, or the total potential obligation over the full contractual term for noncancelable purchase obligations. Payments made towards the purchase of
goods or services under these contracts totaled $395 million, $236 million, and $243 million in 2017, 2016, and 2015, respectively.
2 The aggregate amount of time deposit accounts in denominations of $250,000 or more was $3.2 billion and $1.7 billion at December 31, 2017 and 2016, respectively.
3 Amounts do not include interest.
4 Commitments to fund investments in affordable housing and other partnerships do not have defined funding dates as certain criteria must be met before the Company
is obligated to fund. Accordingly, these commitments are considered to be due on demand for presentation purposes. See Note 10, "Certain Transfers of Financial
Assets and Variable Interest Entities," in this Form 10-K for additional information.
$90,011
$12,066
12,076
2,015
1,331
2,559
247
690
194
105
181
985
959
834
690
617
251
178
—
48
—
—
76
—
50
—
114
Notes to Consolidated Financial Statements, continued
NOTE 12 – NET INCOME PER COMMON SHARE
Equivalent shares of 1 million and 14 million related to common
stock options and common stock warrants outstanding at
December 31, 2016 and 2015, respectively, were excluded from
the computations of diluted net income per average common
share because they would have been anti-dilutive.
Reconciliations of net income to net income available to
common shareholders and the difference between average basic
common shares outstanding and average diluted common shares
outstanding are presented in the following table.
(Dollars and shares in millions, except per share data)
Net income
Less:
Preferred stock dividends
Dividends and undistributed earnings allocated to unvested common share awards
Net income available to common shareholders
Average common shares outstanding - basic
Add dilutive securities:
RSUs
Common stock warrants and restricted stock
Stock options
Average common shares outstanding - diluted
Net income per average common share - diluted
Net income per average common share - basic
Year Ended December 31
2017
2016
2015
$2,273
$1,878
$1,933
(94)
—
(66)
(1)
(64)
(6)
$2,179
$1,811
$1,863
481.3
3.0
1.8
0.9
487.0
$4.47
4.53
498.6
2.9
0.6
1.4
503.5
$3.60
3.63
514.8
2.6
1.7
1.5
520.6
$3.58
3.62
NOTE 13 – CAPITAL
During 2017, pursuant to the Federal Reserve's non-objection to
the Company's capital plan in conjunction with the 2017 CCAR,
the Company increased its quarterly common stock dividend
from $0.26 to $0.40 per share beginning in the third quarter of
2017, maintained dividend payments on its preferred stock, and
repurchased $660 million of its outstanding common stock at
market value (approximately 11.1 million shares) under the 2017
capital plan. During the first half of 2017, the Company
repurchased $480 million of its outstanding common stock,
which completed its authorized repurchase of common equity
under the 2016 CCAR capital plan, which effectively expired on
June 30, 2017. At December 31, 2017, the Company had
remaining capacity under its 2017 capital plan to repurchase an
additional $660 million of its outstanding common stock through
June 30, 2018.
During the years ended December 31, 2017, 2016, and 2015,
the Company declared and paid common dividends of $634
million, or $1.32 per common share, $498 million, or $1.00 per
common share, and $475 million, or $0.92 per common share,
respectively. The Company also recognized dividends on
perpetual preferred stock of $94 million, $66 million, and $64
million during the years ended December 31, 2017, 2016, and
2015, respectively. During 2017, both the Series A and Series B
Perpetual Preferred Stock dividend was $4,056 per share, the
Series E Perpetual Preferred Stock dividend was $5,875 per
share, the Series F Perpetual Preferred Stock dividend was
$5,625 per share, the Series G Perpetual Preferred Stock dividend
115
was $3,128 per share, and the Series H Perpetual Preferred Stock
dividend was $669 per share.
The Company remains subject to certain restrictions on its
ability to increase the dividend on common shares as a result of
participating in the U.S. Treasury’s CPP. If the Company
increases its dividend above $0.54 per share per quarter prior to
the tenth anniversary of its participation in the CPP (in the fourth
quarter of 2018), then the anti-dilution provision within the
warrants issued in connection with the Company’s participation
in the CPP will require the exercise price and number of shares
to be issued upon exercise to be proportionately adjusted. The
amount of such adjustment is determined by a formula and
depends in part on the extent to which the Company raises its
dividend. The formulas are contained in the warrant agreements
which were filed as exhibits to Registration Statements on Form
8-A filed on September 23, 2011.
Substantially all of the Company’s retained earnings are
undistributed earnings of the Bank, which are restricted by
various regulations administered by federal and state bank
regulatory authorities. At both December 31, 2017 and 2016,
retained earnings of the Bank available for payment of cash
dividends to the Parent Company under these regulations totaled
approximately $2.5 billion. Additionally, the Federal Reserve
requires
reserves. At
December 31, 2017 and 2016, these reserve requirements totaled
$1.2 billion and $1.3 billion, respectively, and were fulfilled with
a combination of cash on hand and deposits at the Federal
Reserve.
to maintain cash
the Company
Notes to Consolidated Financial Statements, continued
is subject
Regulatory Capital
to various regulatory capital
The Company
requirements
the
Company’s assets. The following table presents regulatory
capital metrics for SunTrust and the Bank at December 31:
involve quantitative measures of
that
(Dollars in millions)
SunTrust Banks, Inc.
CET1
Tier 1 capital
Total capital
Leverage
SunTrust Bank
CET1
Tier 1 capital
Total capital
Leverage
2017
2016
Amount
Ratio
Amount
Ratio
$17,141
19,622
23,028
$19,474
19,496
22,132
9.74% $16,953
11.15
18,186
13.09
21,685
9.80
11.29% $18,535
11.31
18,573
12.83
21,276
9.97
9.59%
10.28
12.26
9.22
10.71%
10.73
12.29
9.63
In 2013, the Federal Reserve published final rules in the Federal
Register implementing Basel III. These rules, which became
effective for the Company and the Bank on January 1, 2015,
include the following minimum capital requirements: CET1
ratio of 4.5%; Tier 1 capital ratio of 6%; Total capital ratio of
8%; Leverage ratio of 4%; and a capital conservation buffer of
2.5%. The capital conservation buffer became applicable on
January 1, 2016 and is being phased-in through December 31,
2018.
Preferred Stock
Preferred stock at December 31 consisted of the following:
(Dollars in millions)
Series A (1,725 shares outstanding)
Series B (1,025 shares outstanding)
Series E (4,500 shares outstanding)
Series F (5,000 shares outstanding)
Series G (7,500 shares outstanding)
Series H (5,000 shares outstanding)
2017
2016
2015
$172
$172
$172
103
450
500
750
500
103
450
500
—
—
103
450
500
—
—
Total preferred stock
$2,475
$1,225
$1,225
In September 2006, the Company authorized and issued
depositary shares representing ownership interests in 5,000
shares of Perpetual Preferred Stock, Series A, no par value and
$100,000 liquidation preference per share (the "Series A
Preferred Stock"). The Series A Preferred Stock has no stated
maturity and will not be subject to any sinking fund or other
obligation of the Company. Dividends on the Series A Preferred
Stock, if declared, will accrue and be payable quarterly at a rate
per annum equal to the greater of three-month LIBOR plus
0.53%, or 4.00%. Dividends on the shares are noncumulative.
Shares of the Series A Preferred Stock have priority over the
Company’s common stock with regard to the payment of
dividends and, as such, the Company may not pay dividends on
or repurchase, redeem, or otherwise acquire for consideration
shares of its common stock unless dividends for the Series A
Preferred Stock have been declared for that period and sufficient
116
funds have been set aside to make payment. During 2009, the
Company repurchased 3,275 shares of the Series A Preferred
Stock. In September 2011, the Series A Preferred Stock became
redeemable at the Company’s option at a redemption price equal
to $100,000 per share, plus any declared and unpaid dividends.
Except in certain limited circumstances, the Series A Preferred
Stock does not have any voting rights.
In October 2006, the Company authorized 5,010 shares of
Perpetual Preferred Stock, Series B, and in December 2011, the
Company issued 1,025 shares of Perpetual Preferred Stock,
Series B, no par value and $100,000 liquidation preference per
share (the "Series B Preferred Stock"). The Series B Preferred
Stock has no stated maturity and will not be subject to any sinking
fund or other obligation of the Company. Dividends on the shares
are noncumulative and, if declared, will accrue and be payable
quarterly at a rate per annum equal to the greater of three-month
LIBOR plus 0.645%, or 4.00%. Shares of the Series B Preferred
Stock have priority over the Company's common stock with
regard to the payment of dividends and, as such, the Company
may not pay dividends on or repurchase, redeem, or otherwise
acquire for consideration shares of its common stock unless
dividends for the Series B Preferred Stock have been declared
for that period and sufficient funds have been set aside to make
payment. The Series B Preferred Stock was immediately
redeemable upon issuance at the Company's option at a
redemption price equal to $100,000 per share, plus any declared
and unpaid dividends. Except in certain limited circumstances,
the Series B Preferred Stock does not have any voting rights.
In December 2012, the Company authorized and issued
depositary shares representing ownership interests in 5,000
shares and 4,500 shares, respectively, of Perpetual Preferred
Stock, Series E, no par value and $100,000 liquidation preference
per share (the "Series E Preferred Stock"). The Series E Preferred
Stock has no stated maturity and will not be subject to any sinking
fund or other obligation of the Company to redeem, repurchase,
or retire the shares. Dividends on the shares are noncumulative
and, if declared, will accrue and be payable quarterly at a rate
per annum of 5.875%. Shares of the Series E Preferred Stock
have priority over the Company's common stock with regard to
the payment of dividends and rank equally with the Company's
outstanding Perpetual Preferred Stock, Series A and Series B
and, as such, the Company may not pay dividends on or
repurchase, redeem, or otherwise acquire for consideration
shares of its common stock unless dividends for the Series E
Preferred Stock have been declared for that period and sufficient
funds have been set aside to make payment. The Series E
Preferred Stock is redeemable, at the option of the Company, on
any dividend payment date occurring on or after March 15, 2018
or at any time within 90 days following a regulatory capital event,
at a redemption price equal to $100,000 per share, plus any
declared and unpaid dividends, without regard to any undeclared
dividends. Except in certain limited circumstances, the Series E
Preferred Stock does not have any voting rights.
In November 2014, the Company authorized and issued
depositary shares representing ownership interest in 5,000 shares
of Perpetual Preferred Stock, Series F, with no par value and
$100,000 liquidation preference per share (the "Series F
Preferred Stock"). The Series F Preferred Stock has no stated
maturity and will not be subject to any sinking fund or other
Notes to Consolidated Financial Statements, continued
obligation of the Company to redeem, repurchase, or retire the
shares. Dividends for the shares are noncumulative and, if
declared, will be payable semi-annually beginning on June 15,
2015 through December 15, 2019 at a rate per annum of 5.625%,
and payable quarterly beginning on March 15, 2020 at a rate per
annum equal to the three-month LIBOR plus 3.86%. By its terms,
the Company may redeem the Series F Preferred Stock on any
dividend payment date occurring on or after December 15, 2019
or at any time within 90 days following a regulatory capital event,
at a redemption price of $100,000 per share plus any declared
and unpaid dividends. Except in certain limited circumstances,
the Series F Preferred Stock does not have any voting rights.
In May 2017, the Company authorized and issued depositary
shares representing ownership interest in 7,500 shares of
Perpetual Preferred Stock, Series G, with no par value and
$100,000 liquidation preference per share (the "Series G
Preferred Stock"). The Series G Preferred Stock has no stated
maturity and will not be subject to any sinking fund or other
obligation of the Company to redeem, repurchase, or retire the
shares. Dividends for the shares are noncumulative and, if
declared, will be payable semi-annually beginning on December
15, 2017 through June 15, 2022 at a rate per annum of 5.05%,
and payable quarterly beginning on September 15, 2022 at a rate
per annum equal to the three-month LIBOR plus 3.102%. By its
terms, the Company may redeem the Series G Preferred Stock
on any dividend payment date occurring on or after June 15,
2022 or at any time within 90 days following a regulatory capital
event, at a redemption price of $100,000 per share plus any
declared and unpaid dividends. Except in certain limited
circumstances, the Series G Preferred Stock does not have any
voting rights.
In November 2017, the Company authorized and issued
depositary shares representing ownership interest in 5,000 shares
of Perpetual Preferred Stock, Series H, with no par value and
$100,000 liquidation preference per share (the "Series H
Preferred Stock"). The Series H Preferred Stock has no stated
maturity and will not be subject to any sinking fund or other
obligation of the Company to redeem, repurchase, or retire the
shares. Dividends for the shares are noncumulative and, if
declared, will be payable semi-annually beginning on June 15,
2018 through December 15, 2027 at a rate per annum of 5.125%,
and payable quarterly beginning on March 15, 2028 at a rate per
annum equal to the three-month LIBOR plus 2.786%. By its
terms, the Company may redeem the Series H Preferred Stock
on any dividend payment date occurring on or after December
15, 2027 or at any time within 90 days following a regulatory
capital event, at a redemption price of $100,000 per share plus
any declared and unpaid dividends. Except in certain limited
circumstances, the Series H Preferred Stock does not have any
voting rights.
In 2008, the Company issued to the U.S. Treasury as part of
the CPP, 35,000 and 13,500 shares of Series C and D Fixed Rate
Cumulative Perpetual Preferred Stock, respectively, and Series
A and B warrants to purchase a total of 17.9 million shares of
the Company's common stock. The Series A warrants entitle the
holder to purchase 6 million shares of the Company's common
stock at an exercise price of $33.70 per share, while the Series
B warrants entitle the holder to purchase 11.9 million shares of
the Company's common stock at an exercise price of $44.15 per
share.
In March 2011, the Company repurchased its Series C and
D Preferred Stock from the U.S. Treasury, and in September
2011, the U.S. Treasury held a public auction to sell the Series
A and B common stock purchase warrants. In conjunction with
the U.S. Treasury's auction, the Company acquired 4 million of
the common stock purchase warrants, Series A, for $11 million,
which were then retired. In January and February of 2016, the
Company acquired an additional 1.1 million of Series A common
stock warrants and 5.4 million of Series B common stock
warrants as part of its 2015 CCAR capital plan for a total of $24
million.
At December 31, 2017, 7.1 million warrants to purchase the
Company's common stock remained outstanding and the
Company had authority from its Board to repurchase all of these
outstanding stock purchase warrants. The Series A and B
warrants have expiration dates of December 2018 and November
2018, respectively.
117
Notes to Consolidated Financial Statements, continued
NOTE 14 - INCOME TAXES
The components of the Provision for income taxes included in the Consolidated Statements of Income for the years ended December
31 are presented in the following table:
(Dollars in millions)
Current income tax provision:
Federal
State
Total
Deferred income tax provision/(benefit):
Federal
State
Total
Total provision for income taxes
2017
2016
2015
$129
59
188
275
69
344
$532
$667
27
694
59
52
111
$805
$707
36
743
27
(6)
21
$764
The 2017 Tax Act, enacted on December 22, 2017, reduced the
U.S. federal corporate income tax rate from 35% to 21% effective
January 1, 2018. At December 31, 2017, the Company recorded
a net income tax benefit for the estimated effects of the 2017 Tax
Act as a component of the provision for income taxes, which
was due primarily to a $333 million tax benefit for the
remeasurement of the Company's estimated DTAs and DTLs to
reflect the new federal income tax rate of 21%. However, as
additional information becomes available and additional
analysis is completed, the estimate of the DTAs and DTLs may
change, which could impact the remeasurement of these deferred
tax balances. Any adjustment to the remeasurement amount
would be recorded as an adjustment to the provision for income
taxes in 2018 in the period the amounts are determined.
The provision for income taxes does not reflect the tax
effects of unrealized gains and losses and other income and
expenses recorded in AOCI, with the exception of the
remeasurement of the related DTAs and DTLs due to the
enactment of the 2017 Tax Act. For additional information
see Note 21, “Accumulated Other
regarding AOCI,
Comprehensive Loss.”
A reconciliation of the income tax provision, using the
statutory federal income tax rate of 35%, to the Company’s actual
provision for income taxes and the effective tax rate during the
years ended December 31 are presented in the following table:
(Dollars in millions)
2017
2016
2015
Amount
% of
Pre-Tax
Income
Amount
% of
Pre-Tax
Income
Amount
% of
Pre-Tax
Income
Income tax provision at federal statutory rate
$982
35.0%
$939
35.0%
$944
35.0%
Increase/(decrease) resulting from:
State income taxes, net
Tax-exempt interest
Changes in UTBs (including interest), net
Income tax credits, net of amortization 1
Estimated impact of the remeasurement of DTAs and DTLs
and other tax reform-related items 2
66
(90)
26
(117)
2.4
(3.2)
0.9
(4.2)
53
(86)
6
(86)
(303)
(32)
$532
(10.8)
(1.1)
19.0%
—
(21)
$805
2.0
(3.2)
0.2
(3.2)
—
0.9
(3.3)
(1.1)
(2.6)
—
25
(88)
(31)
(69)
—
(17)
$764
Other 3
(0.6)
28.3%
Total provision for income taxes and effective tax rate
1 Excludes income tax benefits of $43 million, $2 million, and $6 million for the years ended December 31, 2017, 2016, and 2015, respectively, related to tax credits,
which were recognized as a reduction to the related investment asset.
2 Includes reasonable estimates as of December 31, 2017, which could be adjusted as additional analysis is completed in 2018.
3 Includes excess tax benefits of $25 million and $15 million for the years ended December 31, 2017 and 2016, respectively, related to the Company's adoption of
ASU 2016-09.
(0.8)
30.0%
Deferred income tax assets and liabilities result from differences
between the timing of the recognition of assets and liabilities for
financial reporting purposes and for income tax purposes. These
assets and liabilities are measured using the enacted federal and
state tax rates expected to apply in the periods in which the DTAs
or DTLs are expected to be realized. The net deferred income
tax liability is recorded in Other liabilities in the Consolidated
Balance Sheets.
118
At December 31, 2017, the Company remeasured its DTAs
and DTLs using the newly enacted federal income tax rate of
21%, which is the rate that is expected to apply in the periods in
which these assets and liabilities are expected to be realized in
the future.
Notes to Consolidated Financial Statements, continued
The significant DTAs and DTLs at December 31, net of the federal impact for state taxes, are presented in the following table:
(Dollars in millions)
DTAs:
ALLL
Net unrealized losses in AOCI
State NOLs and other carryforwards
Accruals and reserves
Other
Total gross DTAs
Valuation allowance
Total DTAs
DTLs:
Leasing
Servicing rights
Employee compensation and benefits
Deferred income
Goodwill and other intangible assets
Fixed assets
Loans
Other
Total DTLs
Net DTL
2017 1
2016 2
$412
302
227
180
17
1,138
(143)
995
459
290
210
193
155
111
104
41
1,563
$639
472
170
343
19
1,643
(80)
1,563
659
370
179
22
233
113
176
43
1,795
($568)
($232)
1 The Company's DTAs and DTLs for December 31, 2017 were calculated using the enacted federal income rate of 21%.
2 The Company's DTAs and DTLs for December 31, 2016 were calculated using the enacted federal income rate of 35%.
The DTAs include state NOLs and other state carryforwards that
will expire, if not utilized, in varying amounts from 2018 to 2037.
At December 31, 2017 and 2016, the Company had a valuation
allowance recorded against its state carryforwards and certain
state DTAs of $143 million and $80 million, respectively. The
increase in the valuation allowance was due primarily to an
increase in the valuation allowance recorded for STM's state
NOLs as well as the reduction in the federal benefit of the state
valuation allowance due to the reduction in the federal income
tax rate. A valuation allowance is not required for the federal and
the remaining state DTAs because the Company believes it is
more-likely-than-not that these assets will be realized.
The following table provides a rollforward of the Company's
gross federal and state UTBs, excluding interest and penalties,
during the years ended December 31:
(Dollars in millions)
Balance at January 1
2017
2016
$111
$100
Increases in UTBs related to prior years
Decreases in UTBs related to prior years
Increases in UTBs related to the current year
Decreases in UTBs related to settlements
Balance at December 31
22
(5)
13
—
$141
18
(4)
13
(16)
$111
The amount of UTBs that would favorably affect the Company's
effective tax rate, if recognized, was $112 million at
December 31, 2017.
Interest and penalties related to UTBs are recorded in the
Provision for income taxes in the Consolidated Statements of
Income. The Company had a gross liability of $17 million and
$8 million for interest and penalties related to its UTBs at
December 31, 2017 and 2016, respectively. During the years
ended December 31, 2017 and 2016, the Company recognized
a gross expense of $10 million and a gross benefit of less than
$1 million, respectively, related to interest and penalties on the
UTBs.
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 2012.
With limited exceptions, the Company is no longer subject to
examination by state and local taxing authorities for taxable years
prior to 2012. It is reasonably possible that the liability for UTBs
could decrease by as much as $30 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.
119
Notes to Consolidated Financial Statements, continued
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company sponsors various compensation and benefit
programs to attract and retain talent. Aligned with a pay for
performance culture, the Company's plans and programs include
short-term incentives, AIP, and various LTI plans. All incentive
awards are subject to clawback provisions. Compensation
expense for AIP and LTI plans with cash payouts was $319
million, $291 million, and $245 million for the years ended
December 31, 2017, 2016, and 2015,
respectively.
Compensation expense for short-term incentive plans with cash
payouts was $476 million, $469 million, and $448 million for
the years ended December 31, 2017, 2016, and 2015,
respectively.
Stock-Based Compensation
The Company provides stock-based awards through the 2009
Stock Plan and various other deferred compensation plans under
which the Compensation Committee of the Board of Directors
has the authority to grant stock options, stock appreciation rights,
restricted stock, phantom stock units, and RSUs to key
employees of the Company. Award vesting may be conditional
based upon individual, business unit, Company, and/or
performance relative to peer group metrics.
Effective January 1, 2014, following approval by the
Compensation Committee of the Board, shareholders approved
an amendment to the 2009 Stock Plan to remove the sub-limit
on shares available for grant that may be issued as restricted stock
or RSUs. Accordingly, all 17 million remaining authorized
shares previously under the Stock Plan became available for
grant as stock options, stock appreciation rights, restricted stock,
or RSUs. Prior to the amendment, only a portion of such shares
were available to be granted as either restricted stock or RSUs.
At December 31, 2017, approximately 16 million shares were
available for grant. All stock option grants are exercisable for 10
years after the grant date.
Shares or units of restricted stock may be granted to
employees and directors. Generally, grants to employees either
cliff vest after three years or vest pro-rata annually over three
years. Restricted stock and RSU grants may be subject to one or
more criteria, including employment, performance, or other
conditions as established by the Compensation Committee at the
time of grant. Any shares of restricted stock that are forfeited
will again become available for issuance under the Stock Plan.
An employee or director has the right to vote the shares of
restricted stock after grant until they are forfeited. Compensation
cost for restricted stock and RSUs is generally equal to the fair
market value of the shares on the grant date of the award and is
amortized over the vesting period. Dividends are paid on
awarded, unvested restricted stock. The Company accrues and
reinvests dividends in equivalent shares of SunTrust common
stock for unvested RSU awards, which are paid out when the
underlying RSU award vests. RSU awards are generally
classified as equity.
Consistent with the Company's 2014 decision to discontinue
the issuance of stock options, no stock options were granted
during the years ended December 31, 2017, 2016, and 2015.
The following table presents a summary of stock options, restricted stock, and RSU activity for the year ended December 31, 2017:
Stock Options
Restricted Stock
RSUs
(Dollars in millions, except per share
data)
Shares
Price
Range
Weighted
Average
Exercise
Price
Balance, January 1, 2017
3,253,793
$9.06 - 85.34
$42.54
Granted
—
—
Exercised/distributed
(830,383)
9.06 - 64.58
Cancelled/expired/forfeited
(764,105)
56.34 - 85.34
Balance, December 31, 2017
1,659,305
$9.06 - 64.58
Exercisable, December 31, 2017
1,659,305
—
25.38
81.77
$35.33
$35.33
Deferred
Compensation
Weighted
Average
Grant
Price
Weighted
Average
Grant
Price
Shares
$—
$42.44
4,175,809
$36.27
1
—
—
$1
57.19
42.44
—
1,901,144
(1,703,795)
(219,439)
59.95
36.62
44.32
$57.19
4,153,719
$44.68
Shares
11,312
8,744
(11,312)
—
8,744
120
Notes to Consolidated Financial Statements, continued
The following table presents stock option information at December 31, 2017:
Options Outstanding
Options Exercisable
(Dollars in millions,
except per share
data)
Number
Outstanding
at
December 31,
2017
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Total
Aggregate
Intrinsic
Value
Number
Exercisable
at
December 31,
2017
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Total
Aggregate
Intrinsic
Value
Range of Exercise Prices:
$9.06 to 49.46
$64.58
$9.06 to 64.58
1,170,605
488,700
1,659,305
$23.12
64.58
$35.33
3.42
0.12
2.45
$48,545
5
$48,550
1,170,605
488,700
1,659,305
$23.12
64.58
$35.33
3.42
0.12
2.45
$48,545
5
$48,550
Stock-based
in
Employee compensation in the Consolidated Statements of
Income consisted of the following:
compensation
recognized
expense
(Dollars in millions)
RSUs
Phantom stock units 1
Restricted stock
Years Ended December 31
2017
2016
2015
$83
$56
$46
77
—
—
67
2
—
32
16
1
Total stock-based compensation
expense
$160
$125
$95
Stock-based compensation tax
benefit 2
$61
$48
$36
1 Phantom stock units are settled in cash. The Company paid $80 million, $28
million, and $16 million during the years ended December 31, 2017, 2016, and
2015, respectively, related to these share-based liabilities.
2 Does not include excess tax benefits or deficiencies recognized in the Provision
for income taxes in the Consolidated Statements of Income.
Retirement Plans
frozen,
various
Noncontributory Pension Plans
funded,
The Company maintains
noncontributory qualified retirement plans ("Retirement Plans")
covering employees meeting certain service requirements. The
Retirement Plans provide benefits based on salary and years of
service. The SunTrust Retirement Plan includes a cash balance
formula where the PPAs continue to be credited with interest
each year. The interest crediting rate applied to each PPA was
3.11% for 2017. The Company monitors the funded status of the
Retirement Plans closely and, due to the current funded status,
the Company did not make a contribution to them for the 2017
plan year.
The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value (the difference between the
Company’s closing stock price on the last trading day of 2017
and the exercise price, multiplied by the number of in-the-money
stock options) that would have been received by the option
holders had all option holders exercised their options on
December 31, 2017. Additional option and stock-based
compensation information at December 31 is presented in the
following table:
(Dollars in millions)
Intrinsic value of options exercised 1
Fair value of vested restricted shares 1
Fair value of vested RSUs 1
1 Measured as of the grant date.
2017
2016
2015
Stock options
$28
—
62
$43
41
74
$15
35
23
respectively,
At December 31, 2017 and 2016, there was $75 million and $65
million,
stock-based
compensation expense related to stock options, restricted stock,
and RSUs. The unrecognized stock compensation expense for
December 31, 2017 is expected to be recognized over a weighted
average period of 2.0 years.
unrecognized
of
Additionally, the Company allows for the granting of
phantom stock units, whereby certain employees are granted the
contractual right to receive an amount in cash equal to the fair
market value of a share of common stock on the vesting date.
These shares vest pro-rata annually over three years on the
anniversary of the grant date and are subject to variable
accounting. The employees are entitled to dividend-equivalent
rights on the granted shares. The Company granted less than 1
million, 2 million, and 1 million phantom stock units during the
years ended December 31, 2017, 2016, and 2015, respectively.
The unrecognized compensation expense related to these
phantom stock units as of December 31, 2017 was $56 million
based on the Company's stock price as of that date.
121
Notes to Consolidated Financial Statements, continued
The Company also maintains various frozen, unfunded,
noncontributory nonqualified supplemental defined benefit
pension plans that cover key executives of the Company (the
"SERP", the "ERISA Excess Plan", and the "Restoration Plan").
These plans provide defined benefits based on years of service
and salary.
Other Postretirement Benefits
The Company provides certain health care and life insurance
benefits (“Other Postretirement Benefits”) to retired employees.
At the option of the Company, retirees may continue certain
health and life insurance benefits if they meet specific age and
service requirements at the time of retirement. The health care
plans are contributory with participant contributions adjusted
annually, and the life insurance plans are noncontributory.
Certain retiree health benefits are funded in a Retiree Health
Trust. Additionally, certain retiree life insurance benefits are
funded in a VEBA. Effective April 1, 2014, the Company
amended the plan, which now requires retirees age 65 and older
to enroll in individual Medicare supplemental plans. In addition,
the Company will fund a tax-advantaged HRA to assist some
retirees with medical expenses.
Changes in Benefit Obligations and Plan Assets
The following table presents the change in benefit obligations,
change in fair value of plan assets, funded status, accumulated
benefit obligation, and the weighted average discount rate related
to the Company's pension and other postretirement benefits plans
for the years ended December 31:
(Dollars in millions)
Benefit obligation, beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss/(gain)
Benefits paid
Administrative expenses paid from pension trust
Plan amendments
Special termination benefits
Benefit obligation, end of year 2
Change in plan assets:
Fair value of plan assets, beginning of year
Actual return on plan assets
Employer contributions 3
Plan participants’ contributions
Benefits paid
Administrative expenses paid from pension trust
Fair value of plan assets, end of year 4
Funded status at end of year 5, 6
Funded status at end of year (%)
Pension Benefits 1
Other Postretirement Benefits
2017
2016
2017
2016
$2,747
5
95
—
225
(156)
(6)
—
—
$2,910
$3,016
425
9
—
(156)
(6)
$3,288
$2,716
5
97
—
76
(142)
(5)
—
—
$2,747
$2,879
279
5
—
(142)
(5)
$3,016
$378
113%
$269
110%
$58
—
1
4
(1)
(8)
—
(5)
9
$58
$157
11
—
4
(8)
—
$164
$106
$65
—
2
4
(4)
(9)
—
—
—
$58
$156
5
—
5
(9)
—
$157
$99
Accumulated benefit obligation
$2,910
$2,747
3.62%
Discount rate
3.70%
1 Employer contributions represent the benefits that were paid to nonqualified plan participants. Unfunded nonqualified supplemental pension plans are not funded
through plan assets.
2 Includes $78 million and $80 million of benefit obligations for the unfunded nonqualified supplemental pension plans at December 31, 2017 and 2016, respectively.
3 The Company contributed less than $1 million to the other postretirement benefits plans during both 2017 and 2016.
4 Includes $1 million and $2 million of the Company's common stock acquired by the asset manager and held as part of the equity portfolio for pension benefits at
December 31, 2017 and 2016, respectively. During both 2017 and 2016, there was no SunTrust common stock held in the other postretirement benefit plans.
5 Pension benefits recorded in the Consolidated Balance Sheets included other assets of $456 million and $349 million, and other liabilities of $78 million and $80
million, at December 31, 2017 and 2016, respectively.
6 Other postretirement benefits recorded in the Consolidated Balance Sheets included other assets of $106 million and $99 million at December 31, 2017 and 2016,
respectively.
4.18%
3.29%
122
Notes to Consolidated Financial Statements, continued
Net Periodic Benefit
Components of net periodic benefit related to the Company's pension and other postretirement benefits plans for the years ended
December 31 are presented in the following table and are recognized in Employee benefits in the Consolidated Statements of Income:
(Dollars in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Amortization of actuarial loss
Other
Net periodic benefit
Pension Benefits 1
2016
$5
97
(186)
—
25
—
($59)
2017
$5
95
(195)
—
25
—
($70)
2015
$5
116
(206)
—
21
—
($64)
Other Postretirement Benefits
2017
$—
1
(5)
(6)
—
9
($1)
2016
$—
2
(5)
(6)
—
—
($9)
2015
$—
2
(5)
(6)
—
—
($9)
Weighted average assumptions used to determine net periodic benefit:
Discount rate
Expected return on plan assets
4.18%
6.66
4.44%
6.68
4.09%
6.91
3.70%
3.12
3.95%
3.13
3.60%
3.50
1 Administrative fees are recognized in service cost for each of the periods presented.
In the second quarter of 2017, the Company amended its NCF
Retirement Plan in accordance with its decision to terminate the
pension plan effective as of July 31, 2017. The NCF pension plan
termination is expected to be completed by the end of 2018 and
the Company is in process of evaluating the impact of the
termination and expected future settlement accounting on its
Consolidated Financial Statements and related disclosures.
Amounts Recognized in AOCI
Components of the benefit obligations AOCI balance at
December 31 were as follows:
Pension Benefits
Other
Postretirement
Benefits
(Dollars in millions)
2017
2016
2017
2016
Prior service credit
Net actuarial loss/(gain)
Total AOCI, pre-tax
$—
1,001
$—
1,031
$1,001
$1,031
($58)
(22)
($80)
($59)
(15)
($74)
Other changes in plan assets and benefit obligations recognized
in AOCI during 2017 were as follows:
(Dollars in millions)
Current year prior service credit
Current year actuarial gain
Amortization of prior service credit
Amortization of actuarial loss
Total recognized in AOCI, pre-tax
Total recognized in net periodic
benefit and AOCI, pre-tax
Pension
Benefits
$—
(5)
—
(25)
($30)
($100)
Other
Postretirement
Benefits
($5)
(7)
6
—
($6)
($7)
For pension plans, the estimated actuarial loss that will be
amortized from AOCI into net periodic benefit in 2018 is $23
million. For other postretirement benefit plans, the estimated
prior service credit and actuarial gain to be amortized from AOCI
into net periodic benefit in 2018 is $7 million. The amortization
for net gains and losses reflects a corridor based on 10% of the
greater of the projected benefit obligation or the market-related
value of assets. The amount of net gains and losses that exceeds
the corridor is amortized over a fixed period based on the average
remaining lifetime.
Plan Assumptions
Each year, the SBFC, which includes several members of senior
management, reviews and approves the assumptions used in the
year-end measurement calculations for each plan. The discount
rate for each plan, used to determine the present value of future
benefit obligations, is determined by matching the expected cash
flows of each plan to a yield curve based on long-term, high
quality fixed income debt instruments available as of the
measurement date. A series of benefit payments projected to be
paid by the plan is developed based on the most recent census
data, plan provisions, and assumptions. The benefit payments at
each future maturity date are discounted by the year-appropriate
spot interest rates. The model then solves for the discount rate
that produces the same present value of the projected benefit
payments as generated by discounting each year’s payments by
the spot interest rate.
The Company utilizes a full yield curve approach to estimate
the service and interest cost components of net periodic benefit
expense for pension and other postretirement benefit plans by
applying specific spot rates along the yield curve used in the
determination of the benefit obligation to the relevant projected
cash flows.
Actuarial gains and losses are created when actual
experience deviates from assumptions. The actuarial gains
during 2017 and 2016 for the pension plans resulted primarily
from asset experience, partially offset by losses due to the
decrease in discount rates.
The SBFC establishes investment policies and strategies and
formally monitors
investments
the performance of
throughout the year. The Company’s investment strategy with
respect to pension assets is to invest the assets in accordance with
ERISA and related fiduciary standards. The long-term primary
investment objectives for the pension plans are to provide a
the
123
Notes to Consolidated Financial Statements, continued
commensurate amount of long-term growth of principal and
income in order to satisfy the pension plan obligations without
undue exposure to risk in any single asset class or investment
category. The objectives are accomplished through investments
in equities, fixed income, and cash equivalents using a mix that
is conducive to participation in a rising market while allowing
for protection in a declining market. The portfolio is viewed as
long-term in its entirety, avoiding decisions regarding short-term
concerns and any single investment. Asset allocation, as a percent
of the total market value of the total portfolio, is set with the
target percentages and ranges presented in the investment policy
statement. Rebalancing occurs on a periodic basis to maintain
the target allocation, but normal market activity may result in
deviations.
The basis for determining the overall expected long-term
rate of return on plan assets considers past experience, current
market conditions, and expectations on future trends. A building
block approach is used that considers long-term inflation, real
returns, equity risk premiums, target asset allocations, market
corrections, and expenses. Capital market simulations, survey
data, economic forecasts, and actuarial judgment are all used in
this process. The expected long-term rate of return for pension
obligations is 5.90% for 2018.
The investment strategy for the other postretirement benefit
plans is maintained separately from the strategy for the pension
plans. The Company’s investment strategy is to create a series
of investment returns sufficient to provide a commensurate
amount of long-term principal and income growth in order to
satisfy the other postretirement benefit plan's obligations. Assets
are diversified among equity funds and fixed income investments
according to the mix approved by the SBFC. Due to other
postretirement benefits having a shorter time horizon, a lower
equity profile is appropriate. The expected long-term rate of
return for other postretirement benefits is 3.10% for 2018.
Plan Assets Measured at Fair Value
The following tables present combined pension and other postretirement benefit plan assets measured at fair value. See Note 18,
"Fair Value Election and Measurement" for level definitions within the fair value hierarchy.
(Dollars in millions)
Money market funds 2
Equity securities
Mutual funds 3:
Equity index fund
Tax exempt municipal bond funds
Taxable fixed income index funds
Futures contracts
Fixed income securities
Other assets
Total plan assets
Total
Fair Value Measurements at December 31, 2017 1
Level 3
Level 2
Level 1
$138
936
56
85
12
(5)
2,201
9
$3,432
$138
936
56
85
12
(5)
512
9
$1,743
$—
—
—
—
—
—
1,689
—
$1,689
1 Fair value measurements do not include pension benefits accrued income amounting to less than 0.7% of total plan assets.
2 Includes $11 million for other postretirement benefit plans.
3 Relates exclusively to other postretirement benefit plans.
(Dollars in millions)
Money market funds 2
Equity securities
Mutual funds 3:
Equity index fund
Tax exempt municipal bond funds
Taxable fixed income index funds
Futures contracts
Fixed income securities
Other assets
Total plan assets
Total
Fair Value Measurements at December 31, 2016 1
Level 3
Level 2
Level 1
$112
1,415
47
82
13
(5)
1,486
6
$3,156
$112
1,415
47
82
13
—
—
6
$1,675
$—
—
—
—
—
(5)
1,486
—
$1,481
1 Fair value measurements do not include pension benefits accrued income amounting to less than 0.6% of total plan assets.
2 Includes $16 million for other postretirement benefit plans.
3 Relates exclusively to other postretirement benefit plans.
$—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
—
—
—
$—
124
Notes to Consolidated Financial Statements, continued
Target allocations for pension and other postretirement benefits at December 31, by asset category, are presented below:
Cash equivalents
Equity securities
Debt securities
Total
Pension Benefits
Other Postretirement Benefits
2017 Target
Allocation
% of plan assets
2017
2016
2017 Target
Allocation
% of plan assets
2017
2016
0-10 %
0-40
40-100
4%
29
67
100%
3%
47
50
100%
5-15 %
20-40
50-70
7%
34
59
100%
10%
30
60
100%
The Company sets pension asset values equal to their market
value, reflecting gains and losses immediately rather than
deferring over a period of years, which provides a more realistic
economic measure of the plan’s funded status and cost. Assumed
healthcare cost trend rates have a significant effect on the
amounts reported for the other postretirement benefit plans. At
December 31, 2017, the Company assumed that pre-65 retiree
healthcare costs will increase at an initial rate of 8.25% per year.
The Company expects this annual cost increase to decrease over
an 8-year period to 4.50% per year. The effect of a 1% increase/
decrease in the healthcare cost trend rate for other postretirement
benefit obligations, service cost, and interest cost are less than
$1 million, respectively. Assumed discount rates and expected
returns on plan assets affect the amounts of net periodic benefit.
A 25 basis point increase/decrease in the expected long-term
return on plan assets would increase/decrease the net periodic
benefit by $8 million for pension and other postretirement
benefits plans. A 25 basis point increase/decrease in the discount
rate would change the net periodic benefit by $1 million for
pension and other postretirement benefits plans.
Expected Cash Flows
Expected cash flows for the pension and other postretirement benefit plans are presented in the following table:
(Dollars in millions)
Employer Contributions:
2018 (expected) to plan trusts
2018 (expected) to plan participants 3
Pension Benefits 1
Other Postretirement Benefits
(excluding Medicare Subsidy) 2
$—
9
Expected Benefit Payments:
2018
2019
2020
2021
2022
2023 - 2027
1 Based on the funding status and ERISA limitations, the Company anticipates contributions to the Retirement Plan will not be required during 2018.
2 Expected payments under other postretirement benefit plans are shown net of participant contributions.
3 The expected benefit payments for the SERP will be paid directly from the Company's corporate assets.
210
172
172
170
167
824
$—
—
7
6
6
6
5
18
Defined Contribution Plans
SunTrust's employee benefit program includes a qualified
defined contribution plan. For years ended December 31, 2017,
2016, and 2015, the 401(k) plan provided a dollar-for-dollar
match on the first 6% of eligible pay that a participant, including
executive participants, elected to defer.
SunTrust also maintains the SunTrust Banks, Inc. Deferred
Compensation Plan in which key executives of the Company are
eligible. Matching contributions for the deferred compensation
plan are the same percentage as provided in the 401(k) plan,
subject to limitations imposed by the plans' provisions and
applicable laws and regulations. Matching contributions for both
the Company's 401(k) plan and the deferred compensation plan
fully vest upon two years of completed service. Furthermore,
both plans permit an additional discretionary Company
contribution equal to a fixed percentage of eligible pay.
The Company's 401(k) expense, including any discretionary
contributions, was $130 million, $105 million, and $121 million
for the years ended December 31, 2017, 2016, and 2015,
respectively.
125
Notes to Consolidated Financial Statements, continued
NOTE 16 – GUARANTEES
The Company has undertaken certain guarantee obligations in
the ordinary course of business. The issuance of a guarantee
imposes an obligation for the Company to stand ready to perform
and make future payments should certain triggering events occur.
Payments may be in the form of cash, financial instruments, other
assets, shares of stock, or through provision of the Company’s
services. The following is a discussion of the guarantees that the
Company has issued at December 31, 2017. The Company has
also entered into certain contracts that are similar to guarantees,
but that are accounted for as derivative instruments as discussed
in Note 17, “Derivative Financial Instruments.”
Letters of Credit
Letters of credit are conditional commitments issued by the
Company, generally to guarantee the performance of a client to
a third party in borrowing arrangements, such as CP, bond
financing, or similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved
in extending loan facilities to clients but may be reduced by
selling participations to third parties. The Company issues letters
of credit that are classified as financial standby, performance
standby, or commercial letters of credit; however, commercial
letters of credit are considered guarantees of funding and are not
subject to the disclosure requirements of guarantee obligations.
At December 31, 2017 and 2016, the maximum potential
exposure to loss related to the Company's issued letters of credit
was $2.6 billion and $2.9 billion, respectively. The Company’s
outstanding letters of credit generally have a term of more than
one year. Some standby letters of credit are designed to be drawn
upon in the normal course of business and others are drawn upon
only in circumstances of dispute or default in the underlying
transaction to which the Company is not a party. In all cases, the
Company is entitled to reimbursement from the client. If a letter
of credit is drawn upon and reimbursement is not provided by
the client, the Company may take possession of the collateral
securing the letter of credit, where applicable.
The Company monitors its credit exposure under standby
letters of credit in the same manner as it monitors other
extensions of credit in accordance with its credit policies.
Consistent with the methodologies used for all commercial
borrowers, an internal assessment of the PD and loss severity in
the event of default is performed. The management of credit risk
for letters of credit leverages the risk rating process to focus
greater visibility on higher risk and higher dollar letters of credit.
The allowance associated with letters of credit is a component
of the unfunded commitments reserve recorded in Other
liabilities on the Consolidated Balance Sheets and is included in
the allowance for credit losses as disclosed in Note 7, “Allowance
for Credit Losses.” Additionally, unearned fees relating to letters
of credit are recorded in Other liabilities on the Consolidated
Balance Sheets. The net carrying amount of unearned fees was
immaterial at both December 31, 2017 and 2016.
Loan Sales and Servicing
STM, a consolidated subsidiary of the Company, originates and
purchases residential mortgage loans, a portion of which are sold
to outside investors in the normal course of business through a
combination of whole loan sales to GSEs, Ginnie Mae, and non-
126
agency investors. The Company also originates and sells certain
commercial mortgage loans to Fannie Mae and Freddie Mac,
originates FHA insured loans, and issues and sells Ginnie Mae
commercial MBS secured by FHA insured loans.
When loans are sold, representations and warranties
regarding certain attributes of the loans are made to third party
purchasers. Subsequent to the sale, if a material underwriting
deficiency or documentation defect is discovered, the Company
may be obligated to repurchase the loan or to reimburse an
investor for losses incurred (make whole requests), if such
deficiency or defect cannot be cured by the Company within the
specified period following discovery. These representations and
warranties may extend through the life of the loan. In addition
to representations and warranties related to loan sales, the
Company makes representations and warranties that it will
service the loans in accordance with investor servicing
guidelines and standards, which may include (i) collection and
remittance of principal and interest, (ii) administration of escrow
for taxes and insurance, (iii) advancing principal, interest, taxes,
insurance, and collection expenses on delinquent accounts, and
(iv) loss mitigation strategies, including loan modifications and
foreclosures.
The following table summarizes the changes in the
Company’s reserve for residential mortgage loan repurchases for
the years ended December 31:
(Dollars in millions)
2017
2016
2015
Balance, beginning of period
Repurchase provision/(benefit)
Charge-offs, net of recoveries
Balance, end of period
$40
—
(1)
$39
$57
(17)
—
$40
$85
(12)
(16)
$57
A significant degree of judgment is used to estimate the mortgage
repurchase liability as the estimation process is inherently
uncertain and subject to imprecision. The Company believes that
its reserve appropriately estimates incurred losses based on its
current analysis and assumptions. While
the mortgage
repurchase reserve includes the estimated cost of settling claims
related to required repurchases, the Company's estimate of losses
its assumptions regarding GSE and other
depends on
counterparty behavior, loan performance, home prices, and other
factors. The liability is recorded in Other liabilities on the
Consolidated Balance Sheets, and the related repurchase
provision/(benefit) is recognized in Mortgage production related
income in the Consolidated Statements of Income. See Note 19,
"Contingencies," for additional information on current legal
matters related to loan sales.
The following table summarizes the carrying value of the
Company's outstanding repurchased residential mortgage loans
at December 31:
(Dollars in millions)
2017
2016
Outstanding repurchased residential mortgage loans:
Performing LHFI
Nonperforming LHFI
Total carrying value of outstanding
repurchased residential mortgages
$203
16
$219
$230
12
$242
Notes to Consolidated Financial Statements, continued
Residential mortgage loans sold to Ginnie Mae are insured by
the FHA or are guaranteed by the VA. As servicer, the Company
may elect to repurchase delinquent loans in accordance with
Ginnie Mae guidelines; however, the loans continue to be
insured. The Company may also indemnify the FHA and VA for
losses related to loans not originated in accordance with their
guidelines.
Commercial Mortgage Loan Loss Share Guarantee
In connection with the December 2016 acquisition of Pillar, the
Company assumed a loss share obligation associated with the
terms of a master loss sharing agreement with Fannie Mae for
multi-family commercial mortgage loans that were sold by Pillar
to Fannie Mae under Fannie Mae’s delegated underwriting and
servicing program. Upon the acquisition of Pillar, the Company
entered into a lender contract amendment with Fannie Mae for
multi-family commercial mortgage loans that Pillar sold to
Fannie Mae prior to acquisition and that the Company sold to
Fannie Mae subsequent to acquisition, whereby the Company
bears a risk of loss of up to one-third of the incurred losses
resulting from borrower defaults. The breach of any
representation or warranty related to a loan sold to Fannie Mae
could increase the Company's level of risk-sharing associated
with the loan. The outstanding UPB of loans sold subject to the
loss share guarantee was $3.4 billion and $2.9 billion at
December 31, 2017 and 2016, respectively. The maximum
potential exposure to loss was $962 million and $787 million at
December 31, 2017 and 2016, respectively. Using probability of
default and severity of loss estimates, the Company's loss share
liability was $11 million and $6 million at December 31, 2017
and 2016, respectively, and is recorded in Other liabilities on the
Consolidated Balance Sheets.
Visa
The Company executes credit and debit transactions through
Visa and MasterCard. The Company is a defendant, along with
Visa and MasterCard (the “Card Associations”), as well as
several other banks, in one of several antitrust lawsuits
challenging the practices of the Card Associations (the
“Litigation”). The Company entered into judgment and loss
sharing agreements with Visa and certain other banks in order
to apportion financial responsibilities arising from any potential
adverse judgment or negotiated settlements related to the
Litigation. Additionally, in connection with Visa's restructuring
in 2007, shares of Visa common stock were issued to its financial
institution members and the Company received its proportionate
number of shares of Visa Inc. common stock, which were
subsequently converted to Class B shares of Visa Inc. upon
completion of Visa’s IPO in 2008. A provision of the original
Visa By-Laws, which was restated in Visa's certificate of
incorporation, contains a general indemnification provision
between a Visa member and Visa that explicitly provides that
each member's indemnification obligation is limited to losses
arising from its own conduct and the specifically defined
Litigation. While the district court approved a class action
settlement of the Litigation in 2012, the U.S. Court of Appeals
for the Second Circuit reversed the district court's approval of
the settlement on June 30, 2016. The U.S. Supreme Court denied
plaintiffs' petition for certiorari on March 27, 2017, and the case
returned to the district court for further action.
Agreements associated with Visa's IPO have provisions that
Visa will fund a litigation escrow account, established for the
purpose of funding judgments in, or settlements of, the
Litigation. If the escrow account is insufficient to cover the
Litigation losses, then Visa will issue additional Class A shares
(“loss shares”). The proceeds from the sale of the loss shares
would then be deposited in the escrow account. The issuance of
the loss shares will cause a dilution of Visa's Class B shares as
a result of an adjustment to lower the conversion factor of the
Class B shares to Class A shares. Visa U.S.A.'s members are
responsible for any portion of the settlement or loss on the
Litigation after the escrow account is depleted and the value of
the Class B shares is fully diluted.
the derivative,
In May 2009, the Company sold its 3.2 million Class B
shares to the Visa Counterparty and entered into a derivative with
the Visa Counterparty. Under
the Visa
Counterparty is compensated by the Company for any decline
in the conversion factor as a result of the outcome of the
Litigation. Conversely, the Company is compensated by the Visa
Counterparty for any increase in the conversion factor. The
amount of payments made or received under the derivative is a
function of the 3.2 million shares sold to the Visa Counterparty,
the change in conversion rate, and Visa’s share price. The Visa
Counterparty, as a result of its ownership of the Class B shares,
is impacted by dilutive adjustments to the conversion factor of
the Class B shares caused by the Litigation losses. Additionally,
the Company will make periodic payments based on the notional
of the derivative and a fixed rate until the date on which the
Litigation is settled. The fair value of the derivative is estimated
based on unobservable inputs consisting of management's
estimate of the probability of certain litigation scenarios and the
timing of the resolution of the Litigation due in large part to the
aforementioned decision by the U.S. Court of Appeals for the
Second Circuit. The fair value of the derivative liability was $15
million at both December 31, 2017 and 2016. The fair value of
the derivative is estimated based on the Company's expectations
regarding the resolution of the Litigation. The ultimate impact
to the Company could be significantly different based on the
Litigation outcome.
Public Deposits
The Company holds public deposits from various states in which
it does business. Individual state laws require banks to
collateralize public deposits, typically as a percentage of their
public deposit balance in excess of FDIC insurance and may also
require a cross-guarantee among all banks holding public
deposits of the individual state. The amount of collateral required
varies by state and may also vary by bank within each state,
depending on the individual state's risk assessment of each
participating bank. Certain of the states in which the Company
holds public deposits use a pooled collateral method, whereby
in the event of default of a bank holding public deposits, the
collateral of the defaulting bank is liquidated to the extent
necessary to recover the loss of public deposits of the defaulting
bank. To the extent the collateral is insufficient, the remaining
public deposit balances of the defaulting bank are recovered
through an assessment of the other banks holding public deposits
in that state. The maximum potential amount of future payments
the Company could be required to make is dependent on a variety
of factors, including the amount of public funds held by banks
127
Notes to Consolidated Financial Statements, continued
in the states in which the Company also holds public deposits
and the amount of collateral coverage associated with any
defaulting bank. Individual states appear to be monitoring this
risk and evaluating collateral requirements; therefore, the
likelihood that the Company would have to perform under this
guarantee is dependent on whether any banks holding public
funds default as well as the adequacy of collateral coverage.
and
provides
agreements
Other
In the normal course of business, the Company enters into
indemnification
standard
representations and warranties in connection with numerous
transactions. These transactions include those arising from
securitization activities, underwriting agreements, merger and
acquisition agreements, swap clearing agreements, loan sales,
contractual commitments, payment processing, sponsorship
transactions or
agreements, and various other business
arrangements. The extent of the Company's obligations under
these indemnification agreements depends upon the occurrence
of future events; therefore, the Company's potential future
liability under these arrangements is not determinable. STIS and
STRH, broker-dealer affiliates of the Company, use a common
third party clearing broker to clear and execute their customers'
securities transactions and to hold customer accounts. Under
their respective agreements, STIS and STRH agree to indemnify
the clearing broker for losses that result from a customer's failure
to fulfill its contractual obligations. As the clearing broker's
rights to charge STIS and STRH have no maximum amount, the
Company believes that the maximum potential obligation cannot
be estimated. However, to mitigate exposure, the affiliate may
seek recourse from the customer through cash or securities held
in the defaulting customer's account. For the years ended
December 31, 2017, 2016, and 2015, STIS and STRH
experienced minimal net losses as a result of the indemnity. The
clearing agreements expire in May 2020 for both STIS and
STRH.
NOTE 17 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters
into various derivative financial
instruments, both in a dealer capacity to facilitate client
transactions and as an end user as a risk management tool. The
Company generally manages the risk associated with these
derivatives within the established MRM and credit risk
management frameworks. Derivatives may be used by the
Company to hedge various economic or client-related exposures.
In such instances, derivative positions are typically monitored
using a VAR methodology, with exposures reviewed daily.
Derivatives are also used as a risk management tool to hedge the
Company’s balance sheet exposure to changes in identified cash
flow and fair value risks, either economically or in accordance
with hedge accounting provisions. The Company’s Corporate
Treasury function is responsible for employing the various hedge
strategies to manage these objectives. The Company enters into
IRLCs on residential and commercial mortgage loans that are
accounted for as freestanding derivatives. Additionally, certain
contracts containing embedded derivatives are measured, in their
entirety, at fair value. All derivatives, including both freestanding
as well as any embedded derivatives that the Company bifurcates
from the host contracts, are measured at fair value in the
Consolidated Balance Sheets in Trading assets and derivative
instruments and Trading liabilities and derivative instruments.
The associated gains and losses are either recognized in AOCI,
net of tax, or within the Consolidated Statements of Income,
depending upon the use and designation of the derivatives.
Credit and Market Risk Associated with Derivative Instruments
Derivatives expose the Company to risk that the counterparty to
the derivative contract does not perform as expected. The
Company manages its exposure to counterparty credit risk
associated with derivatives by entering into transactions with
counterparties with defined exposure limits based on their credit
quality and in accordance with established policies and
procedures. All counterparties are reviewed regularly as part of
the Company’s credit risk management practices and appropriate
action is taken to adjust the exposure limits to certain
128
counterparties as necessary. The Company’s derivative
transactions are generally governed by ISDA agreements or other
legally enforceable industry standard master netting agreements.
In certain cases and depending on the nature of the underlying
derivative transactions, bilateral collateral agreements are also
utilized. Furthermore, the Company and its subsidiaries are
subject to OTC derivative clearing requirements, which require
certain derivatives to be cleared through central clearing houses,
such as LCH and the CME. These clearing houses require the
Company to post initial and variation margin to mitigate the risk
of non-payment, the latter of which is received or paid daily
based on the net asset or liability position of the contracts.
Effective January 3, 2017, the CME amended its rulebook to
legally characterize variation margin cash payments for cleared
OTC derivatives as settlement rather than as collateral. As a
result, in the first quarter of 2017, the Company began reducing
the corresponding derivative asset and liability balances for
CME-cleared OTC derivatives to reflect the settlement of those
positions via the exchange of variation margin. Variation margin
cash payments for LCH-cleared OTC derivatives continue to be
subject to collateral accounting and characterized by the
Company as collateral through December 31, 2017. However,
effective January 16, 2018, LCH amended its rulebook to legally
characterize variation margin cash payments for cleared OTC
derivatives as settlement rather than as collateral, consistent with
the CME's amended requirements. Accordingly, beginning in the
first quarter of 2018, the Company will begin reducing the
corresponding derivative asset and liability balances for LCH-
cleared OTC derivatives to reflect the settlement of those
positions via the exchange of variation margin.
When the Company has more than one outstanding
derivative transaction with a single counterparty, and there exists
a legal right of offset with that counterparty, the Company
considers its exposure to the counterparty to be the net fair value
of its derivative positions with that counterparty. If the net fair
value is positive, then the corresponding asset value also reflects
cash collateral held. At December 31, 2017, the economic
Notes to Consolidated Financial Statements, continued
would have the right to apply any collateral posted by the Bank
against any net amount owed by the Bank. Additionally, certain
of the Company’s derivative liability positions, totaling $1.1
billion in fair value at both December 31, 2017 and 2016, contain
provisions conditioned on downgrades of the Bank’s credit
rating. These provisions, if triggered, would either give rise to
an ATE that permits the counterparties to close-out net and apply
collateral or, where a CSA is present, require the Bank to post
additional collateral.
At December 31, 2017, the Bank held senior long-term debt
credit ratings of Baal/A-/A- from Moody’s, S&P, and Fitch,
respectively. At December 31, 2017, ATEs have been triggered
for less than $1 million in fair value liabilities. The maximum
additional liability that could be triggered from ATEs was
approximately $17 million at December 31, 2017. At
December 31, 2017, $1.1 billion in fair value of derivative
liabilities were subject to CSAs, against which the Bank has
posted $1.0 billion in collateral, primarily in the form of cash. If
requested by the counterparty pursuant to the terms of the CSA,
the Bank would be required to post additional collateral of
approximately $2 million against these contracts if the Bank were
downgraded to Baa3/BBB. Further downgrades to Ba1/BBB-
would require the Bank to post an additional $2 million of
collateral. Any further downgrades below Ba1/BBB- do not
contain predetermined collateral posting levels.
Notional and Fair Value of Derivative Positions
The following tables present the Company’s derivative positions
at December 31, 2017 and 2016. The notional amounts in the
tables are presented on a gross basis and have been classified
within derivative assets or derivative liabilities based on the
estimated fair value of the individual contract at December 31,
2017 and 2016. Gross positive and gross negative fair value
amounts associated with respective notional amounts are
presented without consideration of any netting agreements,
including collateral arrangements. Net fair value derivative
amounts are adjusted on an aggregate basis, where applicable,
to take into consideration the effects of legally enforceable
master netting agreements, including any cash collateral
received or paid, and are recognized in Trading assets and
derivative instruments or Trading liabilities and derivative
instruments on the Consolidated Balance Sheets. For contracts
constituting a combination of options that contain a written
option and a purchased option (such as a collar), the notional
amount of each option is presented separately, with the purchased
notional amount generally being presented as a derivative asset
and the written notional amount being presented as a derivative
liability. For other contracts that contain a combination of
options, the fair value is generally presented as a single value
with the purchased notional amount if the combined fair value
is positive, and with the written notional amount if the combined
fair value is negative.
exposure of these net derivative asset positions was $541 million,
reflecting $940 million of net derivative gains, adjusted for cash
and other collateral of $399 million that the Company held in
relation to these positions. At December 31, 2016, the economic
exposure of net derivative asset positions was $774 million,
reflecting $1.1 billion of net derivative gains, adjusted for cash
and other collateral held of $339 million.
Derivatives also expose the Company to market risk arising
from the adverse effects that changes in market factors, such as
interest rates, currency rates, equity prices, commodity prices,
or implied volatility, may have on the value of a derivative. The
Company manages this risk by establishing and monitoring
limits on the types and degree of risk that may be undertaken.
The Company measures its market risk exposure using a VAR
methodology for derivatives designated as trading instruments.
Other tools and risk measures are also used to actively manage
risk associated with derivatives including scenario analysis and
stress testing.
take
Derivative instruments are priced using observable market
inputs at a mid-market valuation point and
into
consideration appropriate valuation adjustments for collateral,
market liquidity, and counterparty credit risk. For purposes of
determining fair value adjustments to its OTC derivative
positions, the Company takes into consideration the credit profile
and likelihood of default by counterparties and itself, as well as
its net exposure, which considers legally enforceable master
netting agreements and collateral along with remaining
maturities. The expected loss of each counterparty is estimated
using market-based views of counterparty default probabilities
observed in the single-name CDS market, when available and of
sufficient liquidity. When single-name CDS market data is not
available or not of sufficient liquidity, the probability of default
is estimated using a combination of the Company's internal risk
rating system and sector/rating based CDS data.
For purposes of estimating the Company’s own credit risk
on derivative liability positions, the DVA, the Company uses
probabilities of default from observable, sector/rating based
CDS data. The Company adjusted the net fair value of its
derivative contracts for estimates of both counterparty credit risk
and its own credit risk by approximately $5 million and $6
million at December 31, 2017 and 2016, respectively. For
fair value
additional
measurements, see Note 18, "Fair Value Election and
Measurement."
information on
the Company's
Currently, the majority of the Company’s derivatives
contain contingencies that relate to the creditworthiness of the
Bank. These contingencies, which are contained in industry
standard master netting agreements, may be considered events
of default. Should the Bank be in default under any of these
provisions, the Bank’s counterparties would be permitted to close
out transactions with the Bank on a net basis, at amounts that
would approximate the fair values of the derivatives, resulting
in a single sum due by one party to the other. The counterparties
129
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Derivative instruments designated in cash flow hedging relationships 1
Interest rate contracts hedging floating rate LHFI
Derivative instruments designated in fair value hedging relationships 2
Interest rate contracts hedging fixed rate debt
Interest rate contracts hedging brokered CDs
Total
Derivative instruments not designated as hedging instruments 3
Interest rate contracts hedging:
Residential MSRs 4
LHFS, IRLCs 5
LHFI
Trading activity 6
Foreign exchange rate contracts hedging loans and trading activity
Credit contracts hedging:
LHFI
Trading activity 7
Equity contracts hedging trading activity 6
Other contracts:
IRLCs and other 8
Commodity derivatives
Total
Total derivative instruments
Total gross derivative instruments, before netting
Less: Legally enforceable master netting agreements
Less: Cash collateral received/paid
Total derivative instruments, after netting
December 31, 2017
Asset Derivatives
Liability Derivatives
Notional
Amounts
Fair
Value
Notional
Amounts
Fair
Value
$8,350
$252
$5,850
1,250
30
1,280
31,895
4,550
90
78,223
3,409
—
1,721
13,837
1,671
712
$2
1
—
1
119
9
2
1,066
110
—
15
2,499
18
63
4,670
30
4,700
10,126
3,040
85
48,143
3,649
515
1,733
25,070
346
710
136,108
3,901
93,417
$143,238
$3,904
$106,467
$3,904
(2,731)
(371)
$802
58
—
58
119
6
2
946
102
11
12
2,857
16
61
4,132
$4,442
$4,442
(2,731)
(1,303)
$408
1 See “Cash Flow Hedges” in this Note for further discussion.
2 See “Fair Value Hedges” in this Note for further discussion.
3 See “Economic Hedging and Trading Activities” in this Note for further discussion.
4 Amount includes $16.6 billion of notional amounts related to interest rate futures. These futures contracts settle in cash daily, one day in arrears. The derivative
asset or liability associated with the one day lag is included in the fair value column of this table.
5 Amount includes $190 million of notional amounts related to interest rate futures. These futures contracts settle in cash daily, one day in arrears. The derivative
asset or liability associated with the one day lag is included in the fair value column of this table.
6 Amounts include $9.8 billion of notional amounts related to interest rate futures and $1.2 billion of notional amounts related to equity futures. These futures contracts
settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table. Amounts
also include notional amounts related to interest rate swaps hedging fixed rate debt.
7 Asset and liability amounts include $4 million and $11 million, respectively, of notional amounts from purchased and written credit risk participation agreements,
whose notional is calculated as the notional of the derivative participated adjusted by the relevant RWA conversion factor.
8 Includes $49 million notional amount that is based on the 3.2 million of Visa Class B shares, the conversion ratio from Class B shares to Class A shares, and the
Class A share price at the derivative inception date of May 28, 2009. This derivative was established upon the sale of Class B shares in the second quarter of 2009.
See Note 16, “Guarantees” for additional information.
130
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Derivative instruments designated in cash flow hedging relationships 1
December 31, 2016
Asset Derivatives
Liability Derivatives
Notional
Amounts
Fair
Value
Notional
Amounts
Fair
Value
Interest rate contracts hedging floating rate LHFI
$6,400
$34
$11,050
$265
Derivative instruments designated in fair value hedging relationships 2
Interest rate contracts hedging fixed rate debt
Interest rate contracts hedging brokered CDs
Total
Derivative instruments not designated as hedging instruments 3
Interest rate contracts hedging:
Residential MSRs 4
LHFS, IRLCs 5
LHFI
Trading activity 6
Foreign exchange rate contracts hedging loans and trading activity
Credit contracts hedging:
LHFI
Trading activity 7
Equity contracts hedging trading activity 6
Other contracts:
IRLCs and other 8
Commodity derivatives
Total
Total derivative instruments
Total gross derivative instruments, before netting
Less: Legally enforceable master netting agreements
Less: Cash collateral received/paid
Total derivative instruments, after netting
600
60
660
12,165
11,774
100
70,599
3,231
15
2,128
17,225
2,412
747
2
—
2
413
134
2
1,536
161
—
34
2,095
28
75
4,510
30
4,540
18,774
8,306
36
67,477
3,360
620
2,271
28,658
668
746
120,396
4,478
130,916
$127,456
$4,514
$146,506
$4,514
(3,239)
(291)
$984
81
—
81
335
58
1
1,401
148
8
33
2,477
22
73
4,556
$4,902
$4,902
(3,239)
(1,265)
$398
1 See “Cash Flow Hedges” in this Note for further discussion.
2 See “Fair Value Hedges” in this Note for further discussion.
3 See “Economic Hedging and Trading Activities” in this Note for further discussion.
4 Amount includes $6.7 billion of notional amounts related to interest rate futures. These futures contracts settle in cash daily, one day in arrears. The derivative asset
or liability associated with the one day lag is included in the fair value column of this table.
5 Amount includes $720 million of notional amounts related to interest rate futures. These futures contracts settle in cash daily, one day in arrears. The derivative
asset or liability associated with the one day lag is included in the fair value column of this table.
6 Amounts include $12.3 billion of notional amounts related to interest rate futures and $629 million of notional amounts related to equity futures. These futures
contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table.
Amounts also include notional amounts related to interest rate swaps hedging fixed rate debt.
7 Asset and liability amounts include $5 million and $13 million, respectively, of notional amounts from purchased and written credit risk participation agreements,
whose notional is calculated as the notional of the derivative participated adjusted by the relevant RWA conversion factor.
8 Includes $49 million notional amount that is based on the 3.2 million of Visa Class B shares, the conversion ratio from Class B shares to Class A shares, and the
Class A share price at the derivative inception date of May 28, 2009. This derivative was established upon the sale of Class B shares in the second quarter of 2009.
See Note 16, “Guarantees” for additional information.
131
Notes to Consolidated Financial Statements, continued
Impact of Derivative Instruments on the Consolidated Statements of Income and Shareholders’ Equity
The impacts of derivative instruments on the Consolidated
Statements of Income and the Consolidated Statements of
Shareholders’ Equity for the years ended December 31, 2017,
2016, and 2015 are presented in the following tables. The impacts
are segregated between derivatives that are designated in hedge
accounting relationships and those that are used for economic
hedging or trading purposes, with further identification of the
underlying risks in the derivatives and the hedged items, where
appropriate. The tables do not disclose the financial impact of
the activities that these derivative instruments are intended to
hedge.
(Dollars in millions)
Derivative instruments in cash flow hedging relationships:
Year Ended December 31, 2017
Amount of Pre-tax Loss
Recognized in OCI on
Derivatives
(Effective Portion)
Amount of Pre-tax Gain
Reclassified from AOCI
into Income
(Effective Portion)
Classification of Pre-tax
Gain Reclassified
from AOCI into Income
(Effective Portion)
Interest rate contracts hedging floating rate LHFI 1
($54)
Interest and fees on loans
held for investment
$38
1 During the year ended December 31, 2017, the Company also reclassified $51 million of pre-tax gains from AOCI into Net interest income relating to hedging
relationships that have been terminated and are reclassified into earnings consistent with the pattern of net cash flows expected to be recognized.
(Dollars in millions)
Derivative instruments in fair value hedging relationships:
Interest rate contracts hedging fixed rate debt 1
Interest rate contracts hedging brokered CDs 1
Total
Year Ended December 31, 2017
Amount of Loss on
Derivatives
Recognized in Income
Amount of Gain
on Related Hedged Items
Recognized in Income
Amount of Gain
Recognized in Income
on Hedges
(Ineffective Portion)
($38)
—
($38)
$40
—
$40
$2
—
$2
1 Amounts are recognized in Trading income in the Consolidated Statements of Income.
Classification of Gain/(Loss)
Recognized in Income on Derivatives
Amount of Gain/(Loss) Recognized in
Income on Derivatives During the
Year Ended December 31, 2017
(Dollars in millions)
Derivative instruments not designated as hedging instruments:
Interest rate contracts hedging:
Residential MSRs
LHFS, IRLCs
Trading activity
Mortgage servicing related income
Mortgage production related income
Trading income
Foreign exchange rate contracts hedging loans and trading activity Trading income
Credit contracts hedging:
LHFI
Trading activity
Other contracts:
IRLCs and other
Commodity derivatives
Total
Other noninterest income
Trading income
Mortgage production related income,
Commercial real estate related income
Trading income
132
$42
(54)
42
(37)
(4)
26
185
1
$201
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Derivative instruments in cash flow hedging relationships:
Year Ended December 31, 2016
Amount of Pre-tax Loss
Recognized in OCI on
Derivatives
(Effective Portion)
Amount of Pre-tax Gain
Reclassified from AOCI
into Income
(Effective Portion)
Classification of Pre-tax
Gain Reclassified
from AOCI into Income
(Effective Portion)
Interest rate contracts hedging floating rate LHFI 1
($145)
Interest and fees on loans
held for investment
$147
1 During the year ended December 31, 2016, the Company also reclassified $97 million of pre-tax gains from AOCI into Net interest income relating to hedging
relationships that have been terminated and are reclassified into earnings consistent with the pattern of net cash flows expected to be recognized.
(Dollars in millions)
Derivative instruments in fair value hedging relationships:
Interest rate contracts hedging fixed rate debt 1
Interest rate contracts hedging brokered CDs 1
Total
Year Ended December 31, 2016
Amount of Loss on
Derivatives
Recognized in Income
Amount of Gain
on Related Hedged Items
Recognized in Income
Amount of Gain
Recognized in Income
on Hedges
(Ineffective Portion)
($87)
—
($87)
$89
—
$89
$2
—
$2
1 Amounts are recognized in Trading income in the Consolidated Statements of Income.
(Dollars in millions)
Derivative instruments not designated as hedging instruments:
Interest rate contracts hedging:
Classification of Gain/(Loss)
Recognized in Income on Derivatives
Amount of Gain/(Loss) Recognized in
Income on Derivatives During the
Year Ended December 31, 2016
Residential MSRs
LHFS, IRLCs
LHFI
Trading activity
Mortgage servicing related income
Mortgage production related income
Other noninterest income
Trading income
Foreign exchange rate contracts hedging loans and trading activity
Trading income
Credit contracts hedging:
LHFI
Trading activity
Equity contracts hedging trading activity
Other contracts:
IRLCs
Commodity derivatives
Total
Other noninterest income
Trading income
Trading income
Mortgage production related income
Trading income
$62
(6)
(1)
51
101
(3)
19
4
210
3
$440
133
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Derivative instruments in cash flow hedging relationships:
Year Ended December 31, 2015
Amount of Pre-tax Gain
Recognized in OCI on
Derivatives
(Effective Portion)
Amount of Pre-tax Gain
Reclassified from AOCI
into Income
(Effective Portion)
Classification of Pre-tax
Gain Reclassified
from AOCI into Income
(Effective Portion)
Interest rate contracts hedging floating rate LHFI 1
$246
$169
Interest and fees on loans
held for investment
1 During the year ended December 31, 2015, the Company also reclassified $92 million pre-tax gains from AOCI into Net interest income relating to hedging
relationships that have been terminated and are reclassified into earnings consistent with the pattern of net cash flows expected to be recognized.
(Dollars in millions)
Derivative instruments in fair value hedging relationships:
Interest rate contracts hedging fixed rate debt 1
Interest rate contracts hedging brokered CDs 1
Total
Year Ended December 31, 2015
Amount of Loss on
Derivatives
Recognized in Income
Amount of Gain on
Related Hedged Items
Recognized in Income
Amount of Loss
Recognized in Income
on Hedges
(Ineffective Portion)
($2)
—
($2)
$1
—
$1
($1)
—
($1)
1 Amounts are recognized in Trading income in the Consolidated Statements of Income.
(Dollars in millions)
Derivative instruments not designated as hedging instruments:
Interest rate contracts hedging:
Classification of Gain/(Loss)
Recognized in Income on Derivatives
Amount of Gain/(Loss) Recognized in
Income on Derivatives During the
Year Ended December 31, 2015
Residential MSRs
LHFS, IRLCs
LHFI
Trading activity
Mortgage servicing related income
Mortgage production related income
Other noninterest income
Trading income
Foreign exchange rate contracts hedging loans and trading activity
Trading income
Credit contracts hedging:
LHFI
Trading activity
Equity contracts hedging trading activity
Other contracts:
IRLCs
Commodities
Total
Other noninterest income
Trading income
Trading income
Mortgage production related income
Trading income
$19
(45)
(1)
61
93
(1)
23
4
156
2
$311
134
Notes to Consolidated Financial Statements, continued
Netting of Derivative Instruments
The Company has various financial assets and financial
liabilities that are subject to enforceable master netting
agreements or similar agreements. The Company's securities
borrowed or purchased under agreements to resell, and securities
sold under agreements to repurchase, that are subject to
enforceable master netting agreements or similar agreements,
are discussed in Note 3, "Federal Funds Sold and Securities
Financing Activities." The Company enters into ISDA or other
legally enforceable industry standard master netting agreements
with derivative counterparties. Under the terms of the master
netting agreements, all transactions between the Company and
the counterparty constitute a single business relationship such
that in the event of default, the nondefaulting party is entitled to
set off claims and apply property held by that party in respect of
any transaction against obligations owed. Any payments,
deliveries, or other transfers may be applied against each other
and netted.
tables present
The following
total gross derivative
instrument assets and liabilities at December 31, 2017 and 2016,
which are adjusted to reflect the effects of legally enforceable
master netting agreements and cash collateral received or paid
when calculating the net amount reported in the Consolidated
Balance Sheets. Also included in the tables are financial
instrument collateral related to legally enforceable master netting
agreements that represents securities collateral received or
pledged and customer cash collateral held at third party
custodians. These amounts are not offset on the Consolidated
Balance Sheets but are shown as a reduction to total derivative
instrument assets and liabilities to derive net derivative assets
and liabilities. These amounts are limited to the derivative asset/
liability balance, and accordingly, do not include excess
collateral received/pledged.
(Dollars in millions)
December 31, 2017
Derivative instrument assets:
Derivatives subject to master netting arrangement or similar
arrangement
Derivatives not subject to master netting arrangement or similar
arrangement
Exchange traded derivatives
Total derivative instrument assets
Derivative instrument liabilities:
Derivatives subject to master netting arrangement or similar
arrangement
Derivatives not subject to master netting arrangement or similar
arrangement
Exchange traded derivatives
Total derivative instrument liabilities
December 31, 2016
Derivative instrument assets:
Derivatives subject to master netting arrangement or similar
arrangement
Derivatives not subject to master netting arrangement or similar
arrangement
Exchange traded derivatives
Total derivative instrument assets
Derivative instrument liabilities:
Derivatives subject to master netting arrangement or similar
arrangement
Derivatives not subject to master netting arrangement or similar
arrangement
Exchange traded derivatives
Total derivative instrument liabilities
Gross
Amount
Amount
Offset
Net Amount
Presented in
Consolidated
Balance Sheets
Held/Pledged
Financial
Instruments
Net
Amount
$3,491
$2,923
18
395
—
179
$3,904
$3,102
$4,128
$3,855
130
184
—
179
$4,442
$4,034
$4,193
$3,384
27
294
—
146
$4,514
$3,530
$4,649
$4,358
105
148
—
146
$4,902
$4,504
$568
18
216
1
$802
$273
130
5
2
$408
$809
27
148
$984
1
$291
105
2
2
$398
$28
—
—
$28
$27
—
—
$27
$48
—
—
$48
$33
—
—
$33
$540
18
216
$774
$246
130
5
$381
$761
27
148
$936
$258
105
2
$365
1 At December 31, 2017, $802 million, net of $371 million offsetting cash collateral, is recognized in Trading assets and derivative instruments within the Company's
Consolidated Balance Sheets. At December 31, 2016, $984 million, net of $291 million offsetting cash collateral, is recognized in Trading assets and derivative
instruments within the Company's Consolidated Balance Sheets.
2 At December 31, 2017, $408 million, net of $1.3 billion offsetting cash collateral, is recognized in Trading liabilities and derivative instruments within the Company's
Consolidated Balance Sheets. At December 31, 2016, $398 million, net of $1.3 billion offsetting cash collateral, is recognized in Trading liabilities and derivative
instruments within the Company's Consolidated Balance Sheets.
135
Notes to Consolidated Financial Statements, continued
Credit Derivative Instruments
As part of the Company's trading businesses, the Company enters
into contracts that are, in form or substance, written guarantees;
specifically, CDS, risk participations, and TRS. The Company
accounts for these contracts as derivatives, and accordingly,
records these contracts at fair value, with changes in fair value
recognized in Trading income in the Consolidated Statements of
Income.
At December 31, 2017 and 2016, the gross notional amount
of purchased CDS contracts designated as trading instruments
was $5 million and $135 million, respectively. The fair value of
purchased CDS was immaterial at December 31, 2017 and $3
million at December 31, 2016.
The Company has also entered into TRS contracts on loans.
The Company’s TRS business consists of matched trades, such
that when the Company pays depreciation on one TRS, it receives
the same amount on the matched TRS. To mitigate its credit risk,
the Company typically receives initial cash collateral from the
counterparty upon entering into the TRS and is entitled to
additional collateral if the fair value of the underlying reference
assets deteriorates. There were $1.7 billion and $2.1 billion of
outstanding TRS notional balances at December 31, 2017 and
2016, respectively. The fair values of these TRS assets and
liabilities at December 31, 2017 were $15 million and $13
million, respectively, and related cash collateral held at
December 31, 2017 was $368 million. The fair values of the TRS
assets and liabilities at December 31, 2016 were $34 million and
$31 million, respectively, and related cash collateral held at
December 31, 2016 was $450 million. For additional
information on the Company's TRS contracts, see Note 10,
"Certain Transfers of Financial Assets and Variable Interest
Entities," as well as Note 18, "Fair Value Election and
Measurement."
The Company writes risk participations, which are credit
derivatives, whereby the Company has guaranteed payment to
a dealer counterparty in the event the counterparty experiences
a loss on a derivative, such as an interest rate swap, due to a
failure to pay by the counterparty’s customer (the “obligor”) on
that derivative. The Company manages its payment risk on its
risk participations by monitoring the creditworthiness of the
obligors, which are all corporations or partnerships, through the
normal credit review process that the Company would have
performed had it entered into a derivative directly with the
obligors. To date, no material losses have been incurred related
to the Company’s written risk participations. At December 31,
2017, the remaining terms on these risk participations generally
ranged from less than one year to nine years, with a weighted
average term on the maximum estimated exposure of 5.5 years.
At December 31, 2016, the remaining terms on these risk
participations generally ranged from less than one year to thirty-
one years, with a weighted average term on the maximum
estimated exposure of 8.5 years. The Company’s maximum
estimated exposure to written risk participations, as measured
by projecting a maximum value of the guaranteed derivative
instruments based on interest rate curve simulations and
assuming 100% default by all obligors on the maximum values,
was approximately $55 million and $95 million at December 31,
2017 and 2016, respectively. The fair values of the written risk
participations were immaterial at both December 31, 2017 and
2016.
136
Cash Flow Hedging Instruments
The Company utilizes a comprehensive risk management
strategy to monitor sensitivity of earnings to movements in
interest rates. Specific types of funding and principal amounts
hedged are determined based on prevailing market conditions
and the shape of the yield curve. In conjunction with this strategy,
the Company may employ various interest rate derivatives as
risk management tools to hedge interest rate risk from recognized
assets and liabilities or from forecasted transactions. The terms
and notional amounts of derivatives are determined based on
management’s assessment of future interest rates, as well as other
factors.
Interest rate swaps have been designated as hedging the
exposure to the benchmark interest rate risk associated with
floating rate loans. At December 31, 2017, the maturities for
hedges of floating rate loans ranged from less than one year to
five years, with the weighted average being 3.6 years. At
December 31, 2016, the maturities for hedges of floating rate
loans ranged from less than one year to six years, with the
weighted average being 4.1 years. These hedges have been
highly effective in offsetting the designated risks, yielding an
immaterial amount of ineffectiveness for the years ended
December 31, 2017 and 2016. At December 31, 2017, $21
million of deferred net pre-tax losses on derivative instruments
designated as cash flow hedges on floating rate loans recognized
in AOCI are expected to be reclassified into net interest income
during the next twelve months. The amount to be reclassified
into income incorporates the impact from both active and
terminated cash flow hedges, including the net interest income
earned on the active hedges, assuming no changes in LIBOR.
The Company may choose to terminate or de-designate a hedging
relationship due to a change in the risk management objective
for that specific hedge item, which may arise in conjunction with
an overall balance sheet management strategy.
Fair Value Hedging Instruments
The Company enters into interest rate swap agreements as part
of the Company’s risk management objectives for hedging its
exposure to changes in fair value due to changes in interest rates.
These hedging arrangements convert certain fixed rate long-term
debt and CDs to floating rates. Consistent with this objective,
the Company reflects the accrued contractual interest on the
hedged item and the related swaps as part of current period
interest expense. There were no components of derivative gains
or losses excluded in the Company’s assessment of hedge
effectiveness related to the fair value hedges.
Economic Hedging Instruments and Trading Activities
In addition to designated hedge accounting relationships, the
Company also enters into derivatives as an end user to
economically hedge risks associated with certain non-derivative
and derivative instruments, along with entering into derivatives
in a trading capacity with its clients.
The primary risks that the Company economically hedges
are interest rate risk, foreign exchange risk, and credit risk. The
Company mitigates these risks by entering into offsetting
derivatives either on an individual basis or collectively on a
macro basis.
Notes to Consolidated Financial Statements, continued
The Company utilizes interest rate derivatives as economic
hedges related to:
• Residential MSRs. The Company hedges these instruments
with a combination of interest rate derivatives, including
forward and option contracts, futures, and forward rate
agreements.
• Residential mortgage IRLCs and LHFS. The Company
hedges these instruments using forward and option
contracts, futures, and forward rate agreements.
The Company is exposed to volatility and changes in foreign
exchange rates associated with certain commercial loans. To
hedge against this foreign exchange rate risk, the Company enters
into foreign exchange rate contracts that provide for the future
receipt and delivery of foreign currency at previously agreed-
upon terms.
The Company enters into CDS to hedge credit risk
associated with certain loans held within its Wholesale segment.
The Company accounts for these contracts as derivatives, and
accordingly, recognizes these contracts at fair value, with
changes in fair value recognized in Other noninterest income in
the Consolidated Statements of Income.
Trading activity primarily includes interest rate swaps,
equity derivatives, CDS, futures, options, foreign exchange rate
contracts, and commodity derivatives. These derivatives are
entered into in a dealer capacity to facilitate client transactions,
or are utilized as a risk management tool by the Company as an
end user (predominantly in certain macro-hedging strategies).
137
Notes to Consolidated Financial Statements, continued
NOTE 18 - FAIR VALUE ELECTION AND MEASUREMENT
The Company measures certain assets and liabilities at fair value,
which are classified as level 1, 2, or 3 within the fair value
hierarchy, as shown below, on the basis of whether the
measurement employs observable or unobservable inputs.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s own
assumptions, taking into account information about market
participant assumptions that is readily available.
• Level 1: Quoted prices for identical instruments in active
markets
• Level 2: Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived
valuations in which all significant inputs and significant
value drivers are observable in active markets
• Level 3: Valuations derived from valuation techniques in
which one or more significant inputs or significant value
drivers are unobservable
Fair value is defined as the price that would be received to
sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. The
Company’s recurring fair value measurements are based on
either a requirement to measure such assets and liabilities at fair
value or on the Company’s election to measure certain financial
assets and liabilities at fair value. Assets and liabilities that are
required to be measured at fair value on a recurring basis include
trading securities, securities AFS, and derivative financial
instruments. Assets and liabilities that the Company has elected
to measure at fair value on a recurring basis include its residential
MSRs, trading loans, and certain LHFS, LHFI, brokered time
deposits, and fixed rate debt issuances.
The Company elects to measure certain assets and liabilities
at fair value to better align its financial performance with the
economic value of actively traded or hedged assets or liabilities.
The use of fair value also enables the Company to mitigate non-
economic earnings volatility caused from financial assets and
liabilities being measured using different bases of accounting,
as well as to more accurately portray the active and dynamic
management of the Company’s balance sheet.
The Company uses various valuation techniques and
assumptions in estimating fair value. The assumptions used to
estimate the value of an instrument have varying degrees of
impact to the overall fair value of an asset or liability. This process
involves gathering multiple sources of information, including
broker quotes, values provided by pricing services, trading
activity in other identical or similar securities, market indices,
and pricing matrices. When observable market prices for the
asset or liability are not available, the Company employs various
modeling techniques, such as discounted cash flow analyses, to
estimate fair value. Models used to produce material financial
reporting information are validated prior to use and following
any material change in methodology. Their performance is
monitored at least quarterly, and any material deterioration in
model performance is escalated. This review is performed by
different internal groups depending on the type of fair value asset
or liability.
The Company has formal processes and controls in place to
support the appropriateness of its fair value estimates. For fair
values obtained from a third party, or those that include certain
trader estimates of fair value, there is an independent price
validation function that provides oversight for these estimates.
For level 2 instruments and certain level 3 instruments, the
validation generally involves evaluating pricing received from
two or more third party pricing sources that are widely used by
market participants. The Company evaluates this pricing
information from both a qualitative and quantitative perspective
and determines whether any pricing differences exceed
acceptable thresholds. If thresholds are exceeded, the Company
assesses differences in valuation approaches used, which may
include contacting a pricing service to gain further insight into
the valuation of a particular security or class of securities to
resolve the pricing variance, which could include an adjustment
to the price used for financial reporting purposes.
The Company classifies instruments within level 2 in the
fair value hierarchy when it determines that external pricing
sources estimated fair value using prices for similar instruments
trading in active markets. A wide range of quoted values from
pricing sources may imply a reduced level of market activity and
indicate that significant adjustments to price indications have
been made. In such cases, the Company evaluates whether the
asset or liability should be classified as level 3.
Determining whether to classify an instrument as level 3
involves judgment and is based on a variety of subjective factors,
including whether a market is inactive. A market is considered
inactive if significant decreases in the volume and level of
activity for the asset or liability have been observed. In making
this determination the Company evaluates the number of recent
transactions in either the primary or secondary market, whether
or not price quotations are current, the nature of market
participants, the variability of price quotations, the breadth of
bid/ask spreads, declines in, or the absence of, new issuances,
and the availability of public information. When a market is
determined to be inactive, significant adjustments may be made
to price indications when estimating fair value. In making these
adjustments the Company seeks to employ assumptions a market
participant would use to value the asset or liability, including
consideration of illiquidity in the referenced market.
138
Notes to Consolidated Financial Statements, continued
Recurring Fair Value Measurements
The following tables present certain information regarding assets and liabilities measured at fair value on a recurring basis and the
changes in fair value for those specific financial instruments for which fair value has been elected.
(Dollars in millions)
Assets
Trading assets and derivative instruments:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency
Corporate and other debt securities
CP
Equity securities
Derivative instruments
Trading loans
Total trading assets and derivative instruments
Securities AFS:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities 2
Total securities AFS
LHFS
LHFI
Residential MSRs
Liabilities
Trading liabilities and derivative instruments:
U.S. Treasury securities
Corporate and other debt securities
Equity securities
Derivative instruments
Total trading liabilities and derivative instruments
Brokered time deposits
Long-term debt
Fair Value Measurements
December 31, 2017
Level 1
Level 2
Level 3
Netting
Adjustments 1
Assets/Liabilities
at Fair Value
$157
—
—
—
—
—
56
395
—
608
4,331
—
—
—
—
—
—
—
—
51
4,382
—
—
—
577
—
9
183
769
—
—
$—
395
61
700
655
118
—
3,493
2,149
7,571
—
259
617
22,704
2,086
—
866
—
12
—
26,544
1,577
—
—
—
289
—
4,243
4,532
236
530
$—
—
—
—
—
—
—
16
—
16
—
—
—
—
—
59
—
8
5
418
490
—
196
1,710
—
—
—
16
16
—
—
$—
—
—
—
—
—
—
(3,102)
—
(3,102)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,034)
(4,034)
—
—
$157
395
61
700
655
118
56
802
2,149
5,093
4,331
259
617
22,704
2,086
59
866
8
17
469
31,416
1,577
196
1,710
577
289
9
408
1,283
236
530
1 Amounts represent offsetting cash collateral received from, and paid to, the same derivative counterparties, and the impact of netting derivative assets and derivative
liabilities when a legally enforceable master netting agreement or similar agreement exists. See Note 17, "Derivative Financial Instruments," for additional information.
2 Includes $49 million of mutual fund investments, $15 million of FHLB of Atlanta stock, $403 million of Federal Reserve Bank of Atlanta stock, and $2 million of
other.
139
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Assets
Trading assets and derivative instruments:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency
CLO securities
Corporate and other debt securities
CP
Equity securities
Derivative instruments
Trading loans
Total trading assets and derivative instruments
Securities AFS:
U.S. Treasury securities
Federal agency securities
U.S. states and political subdivisions
MBS - agency residential
MBS - agency commercial
MBS - non-agency residential
MBS - non-agency commercial
ABS
Corporate and other debt securities
Other equity securities 2
Total securities AFS
LHFS
LHFI
Residential MSRs
Liabilities
Trading liabilities and derivative instruments:
U.S. Treasury securities
MBS - agency
Corporate and other debt securities
Derivative instruments
Total trading liabilities and derivative instruments
Brokered time deposits
Long-term debt
Fair Value Measurements
December 31, 2016
Level 1
Level 2
Level 3
Netting
Adjustments 1
Assets/Liabilities
at Fair Value
$539
—
—
—
—
—
—
49
293
—
881
5,405
—
—
—
—
—
—
—
—
102
5,507
—
—
—
697
—
—
149
846
—
—
$—
480
134
567
1
656
140
—
4,193
2,517
8,688
—
313
275
22,436
1,226
—
252
—
30
—
24,532
3,528
—
—
—
1
255
4,731
4,987
78
963
$—
—
—
—
—
—
—
—
28
—
28
—
—
4
—
—
74
—
10
5
540
633
12
222
1,572
—
—
—
22
22
—
—
$—
—
—
—
—
—
—
—
(3,530)
—
(3,530)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,504)
(4,504)
—
—
$539
480
134
567
1
656
140
49
984
2,517
6,067
5,405
313
279
22,436
1,226
74
252
10
35
642
30,672
3,540
222
1,572
697
1
255
398
1,351
78
963
1 Amounts represent offsetting cash collateral received from, and paid to, the same derivative counterparties, and the impact of netting derivative assets and derivative
liabilities when a legally enforceable master netting agreement or similar agreement exists. See Note 17, "Derivative Financial Instruments," for additional information.
2 Includes $102 million of mutual fund investments, $132 million of FHLB of Atlanta stock, $402 million of Federal Reserve Bank of Atlanta stock, and $6 million
of other.
140
Notes to Consolidated Financial Statements, continued
The following tables present the difference between fair value and the aggregate UPB for which the FVO has been elected for certain
trading loans, LHFS, LHFI, brokered time deposits, and long-term debt instruments.
(Dollars in millions)
Assets:
Trading loans
LHFS:
Accruing
Past due 90 days or more
LHFI:
Accruing
Nonaccrual
Liabilities:
Brokered time deposits
Long-term debt
(Dollars in millions)
Assets:
Trading loans
LHFS:
Accruing
LHFI:
Accruing
Nonaccrual
Liabilities:
Brokered time deposits
Long-term debt
Fair Value at
December 31, 2017
Aggregate UPB at
December 31, 2017
Fair Value
Over/(Under)
Unpaid Principal
$2,149
1,576
1
192
4
236
530
$2,111
1,533
1
198
6
233
517
Fair Value at
December 31, 2016
Aggregate UPB at
December 31, 2016
Fair Value
Over/(Under)
Unpaid Principal
$2,517
3,540
219
3
78
963
$2,488
3,516
225
4
80
924
$38
43
—
(6)
(2)
3
13
$29
24
(6)
(1)
(2)
39
141
Notes to Consolidated Financial Statements, continued
The following tables present the change in fair value during the
years ended December 31, 2017, 2016, and 2015 of financial
instruments for which the FVO has been elected, as well as for
residential MSRs. The tables do not reflect the change in fair
value attributable to related economic hedges that the Company
uses to mitigate market-related risks associated with the financial
instruments. Generally, changes in the fair value of economic
hedges are recognized in Trading income, Mortgage production
related income, Mortgage servicing related income, Commercial
real estate related income, or Other noninterest income as
appropriate, and are designed to partially offset the change in
fair value of the financial instruments referenced in the tables
below. The Company’s economic hedging activities are
deployed at both the instrument and portfolio level.
(Dollars in millions)
Assets:
Trading loans
LHFS
Residential MSRs
Liabilities:
Long-term debt
Fair Value Gain/(Loss) for the Year Ended
December 31, 2017 for Items Measured at Fair Value
Pursuant to Election of the FVO
Mortgage
Production
Related
Income 1
Mortgage
Servicing
Related
Income
Other
Noninterest
Income
Trading
Income
Total
Changes in
Fair Values
Included in
Earnings 2
$21
—
—
21
$—
61
5
—
$—
—
(248)
—
$—
—
—
—
$21
61
(243)
21
1 Income related to LHFS does not include income from IRLCs. For the year ended December 31, 2017, income related to residential MSRs includes income recognized upon
the sale of loans reported at LOCOM.
2 Changes in fair value for the year ended December 31, 2017 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS,
and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated Statements of Income.
(Dollars in millions)
Assets:
Trading loans
LHFS
Residential MSRs
Liabilities:
Brokered time deposits
Long-term debt
Fair Value Gain/(Loss) for the Year Ended
December 31, 2016 for Items Measured at Fair Value
Pursuant to Election of the FVO
Mortgage
Production
Related
Income 1
Mortgage
Servicing
Related
Income
Other
Noninterest
Income
Trading
Income
Total
Changes in
Fair Values
Included in
Earnings 2
$15
—
—
4
27
$—
75
3
—
—
$—
—
(245)
—
—
$—
—
—
—
—
$15
75
(242)
4
27
1 Income related to LHFS does not include income from IRLCs. For the year ended December 31, 2016, income related to residential MSRs includes income recognized upon
the sale of loans reported at LOCOM.
2 Changes in fair value for the year ended December 31, 2016 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS,
brokered time deposits, and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated
Statements of Income.
142
Notes to Consolidated Financial Statements, continued
Fair Value (Loss)/Gain for the Year Ended
December 31, 2015 for Items Measured at Fair Value
Pursuant to Election of the FVO
Mortgage
Production
Related
Income 1
Mortgage
Servicing
Related
Income
Other
Noninterest
Income
Trading
Income
Total
Changes in
Fair Values
Included in
Earnings 2
($1)
$—
—
—
—
41
44
—
2
—
$—
—
—
(242)
—
$—
—
5
—
—
($1)
44
5
(240)
41
(Dollars in millions)
Assets:
Trading loans
LHFS
LHFI
Residential MSRs
Liabilities:
Long-term debt
1 Income related to LHFS does not include income from IRLCs. For the year ended December 31, 2015, income related to residential MSRs includes income recognized upon
the sale of loans reported at LOCOM.
2 Changes in fair value for the year ended December 31, 2015 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS,
LHFI, and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated Statements of Income.
The following is a discussion of the valuation techniques and inputs used in estimating fair value for assets and liabilities measured
at fair value on a recurring basis and classified as level 1, 2, and/or 3.
Trading Assets and Derivative Instruments and Securities
Available for Sale
Unless otherwise indicated, trading assets are priced by the
trading desk and securities AFS are valued by an independent
third party pricing service. The third party pricing service gathers
relevant market data and observable inputs, such as new issue
data, benchmark curves, reported trades, credit spreads, and
dealer bids and offers, and integrates relevant credit information,
perceived market movements, and sector news into its matrix
pricing and other market-based modeling techniques.
U.S. Treasury Securities
The Company estimates the fair value of its U.S. Treasury
securities based on quoted prices observed in active markets; as
such, these investments are classified as level 1.
Federal Agency Securities
The Company includes in this classification securities issued by
federal agencies and GSEs. Agency securities consist of debt
obligations issued by HUD, FHLB, and other agencies or
collateralized by loans that are guaranteed by the SBA and are,
therefore, backed by the full faith and credit of the U.S.
government. For SBA instruments, the Company estimates fair
value based on pricing from observable trading activity for
similar securities or from a third party pricing service.
Accordingly, the Company classified these instruments as level
2.
U.S. States and Political Subdivisions
The Company’s investments in U.S. states and political
subdivisions (collectively “municipals”) include obligations of
county and municipal authorities and agency bonds, which are
general obligations of the municipality or are supported by a
specified
revenue source. Holdings are geographically
dispersed, with no significant concentrations in any one state or
municipality. Additionally, all AFS municipal obligations
classified as level 2 are highly rated or are otherwise
collateralized by securities backed by the full faith and credit of
the federal government.
At December 31, 2016, the Company had an immaterial
amount of bonds classified as level 3 AFS municipal securities.
These level 3 AFS municipal securities were redeemable with
the issuer at par and could not be traded in the market. As such,
no significant observable market data for these instruments was
available; therefore, these securities were priced at par. At
December 31, 2017, the Company had no level 3 AFS municipal
securities as these instruments matured during the second quarter
of 2017.
MBS – Agency
Agency MBS includes pass-through securities and collateralized
mortgage obligations issued by GSEs and U.S. government
agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae.
Each security contains a guarantee by the issuing GSE or agency.
For agency MBS, the Company estimates fair value based on
pricing from observable trading activity for similar securities or
from a third party pricing service; accordingly, the Company has
classified these instruments as level 2.
MBS – Non-agency
Non-agency residential MBS includes purchased interests in
third party securitizations, as well as retained interests in
Company-sponsored securitizations of 2006 and 2007 vintage
residential mortgages (including both prime jumbo fixed rate
collateral and floating rate collateral). At the time of purchase or
origination, these securities had high investment grade ratings;
however, through the most recent financial crisis, they
experienced deterioration in credit quality leading to downgrades
to non-investment grade levels. The Company obtains pricing
for these securities from an independent pricing service. The
Company evaluates third party pricing to determine the
reasonableness of the information relative to changes in market
data, such as any recent trades, information received from market
participants and analysts, and/or changes in the underlying
143
Notes to Consolidated Financial Statements, continued
collateral performance. The Company continued to classify non-
agency residential MBS as level 3, as the Company believes that
available third party pricing relies on significant unobservable
assumptions, as evidenced by a persistently wide bid-ask price
range and variability in pricing from the pricing services,
particularly for the vintage and exposures held by the Company.
Non-agency commercial MBS consists of purchased
interests in third party securitizations. These interests have high
investment grade ratings, and the Company obtains pricing for
these securities from an independent pricing service. The
Company has classified these non-agency commercial MBS as
level 2, as the third party pricing service relies on observable
data for similar securities in active markets.
CLO Securities
CLO preference share exposure was estimated at fair value based
on pricing from observable trading activity for similar securities.
Accordingly, the Company classified these instruments as level
2 at December 31, 2016.
Asset-Backed Securities
ABS classified as securities AFS includes purchased interests in
third party securitizations collateralized by home equity loans
and are valued based on third party pricing with significant
unobservable assumptions; as such, they are classified as level
3.
Corporate and Other Debt Securities
Corporate debt securities are comprised predominantly of senior
and subordinate debt obligations of domestic corporations and
are classified as level 2. Other debt securities classified as AFS
in level 3 at December 31, 2017 and 2016 include bonds that are
redeemable with the issuer at par and cannot be traded in the
market. As such, observable market data for these instruments
is not available.
Commercial Paper
The Company acquires CP that is generally short-term in nature
(maturity of less than 30 days) and highly rated. The Company
estimates the fair value of this CP based on observable pricing
from executed trades of similar instruments; as such, CP is
classified as level 2.
Equity Securities
The Company estimates the fair value of its equity securities
classified as trading assets based on quoted prices observed in
active markets; accordingly, these investments are classified as
level 1.
Other equity securities classified as securities AFS include
primarily FHLB of Atlanta stock and Federal Reserve Bank of
Atlanta stock, which are redeemable with the issuer at cost and
cannot be traded in the market; as such, these instruments are
classified as level 3. The Company accounts for the stock based
on industry guidance that requires these investments be carried
at cost and evaluated for impairment based on the ultimate
recovery of cost. The Company estimates the fair value of its
mutual fund investments and certain other equity securities
classified as securities AFS based on quoted prices observed in
active markets; therefore, these investments are classified as
level 1.
Derivative Instruments
The Company holds derivative instruments for both trading and
risk management purposes. Level 1 derivative instruments
generally include exchange-traded futures or option contracts for
which pricing is readily available. The Company’s level 2
instruments are predominantly OTC swaps, options, and
forwards, measured using observable market assumptions for
interest rates, foreign exchange, equity, and credit. Because fair
values for OTC contracts are not readily available, the Company
estimates fair values using internal, but standard, valuation
models. The selection of valuation models is driven by the type
of contract: for option-based products, the Company uses an
appropriate option pricing model such as Black-Scholes. For
forward-based products, the Company’s valuation methodology
is generally a discounted cash flow approach.
The Company's derivative instruments classified as level 2
are primarily transacted in the institutional dealer market and
priced with observable market assumptions at a mid-market
valuation point, with appropriate valuation adjustments for
liquidity and credit risk. See Note 17, “Derivative Financial
Instruments,” for additional information on the Company's
derivative instruments.
The Company's derivative instruments classified as level 3
include IRLCs that satisfy the criteria to be treated as derivative
financial instruments. The fair value of IRLCs on LHFS, while
based on interest rates observable in the market, is highly
dependent on the ultimate closing of the loans. These “pull-
through” rates are based on the Company’s historical data and
reflect the Company’s best estimate of the likelihood that a
commitment will result in a closed loan. As pull-through rates
increase, the fair value of IRLCs also increases. Servicing value
is included in the fair value of IRLCs, and the fair value of
servicing is determined by projecting cash flows, which are then
discounted to estimate an expected fair value. The fair value of
servicing is impacted by a variety of factors, including
prepayment assumptions, discount rates, delinquency rates,
contractually specified servicing fees, servicing costs, and
underlying portfolio characteristics. Because these inputs are not
transparent in market trades, IRLCs are considered to be level 3
assets. During the years ended December 31, 2017 and 2016, the
Company
transferred $191 million and $211 million,
respectively, of net IRLCs out of level 3 as the associated loans
were closed.
Trading Loans
The Company engages in certain businesses whereby electing
to measure loans at fair value for financial reporting aligns with
the underlying business purpose. Specifically, loans included
within this classification include trading loans that are (i) made
or acquired in connection with the Company’s TRS business,
(ii) part of the loan sales and trading business within the
Company’s Wholesale segment, or (iii) backed by the SBA. See
Note 10, "Certain Transfers of Financial Assets and Variable
Interest Entities," and Note 17, “Derivative Financial
Instruments,” for further discussion of this business. All of these
loans are classified as level 2 due to the nature of market data
that the Company uses to estimate fair value.
The loans made in connection with the Company’s TRS
business are short-term, senior demand loans supported by a
pledge agreement granting first priority security interest to the
144
Notes to Consolidated Financial Statements, continued
Bank in all the assets held by the borrower, a VIE with assets
comprised primarily of corporate loans. While these TRS-related
loans do not trade in the market, the Company believes that the
par amount of the loans approximates fair value and no
unobservable assumptions are used by the Company to value
these loans. At December 31, 2017 and 2016, the Company had
$1.7 billion and $2.1 billion of these short-term loans
outstanding, measured at fair value, respectively.
The loans from the Company’s sales and trading business
are commercial and corporate leveraged loans that are either
traded in the market or for which similar loans trade. The
Company elected to measure these loans at fair value since they
are actively traded. For each of the years ended December 31,
2017, 2016, and 2015, the Company recognized an immaterial
amount of gains/(losses) in the Consolidated Statements of
Income due to changes in fair value attributable to instrument-
specific credit risk. The Company is able to obtain fair value
estimates for substantially all of these loans through a third party
valuation service that is broadly used by market participants.
While most of the loans are traded in the market, the Company
does not believe that trading activity qualifies the loans as level
1 instruments, as the volume and level of trading activity is
subject to variability and the loans are not exchange-traded. At
December 31, 2017 and 2016, $48 million and $46 million,
respectively, of loans related to the Company’s trading business
were held in inventory.
SBA loans are similar to SBA securities discussed herein
under “Federal agency securities,” except for their legal form.
In both cases, the Company trades instruments that are fully
guaranteed by the U.S. government as to contractual principal
and interest and there is sufficient observable trading activity
upon which to base the estimate of fair value. As these SBA loans
are fully guaranteed, the changes in fair value are attributable to
factors other than instrument-specific credit risk. At December
31, 2017 and 2016, the Company held $368 million and $310
million of SBA loans in inventory, respectively.
Loans Held for Sale and Loans Held for Investment
Residential Mortgage LHFS
The Company values certain newly-originated residential
mortgage LHFS at fair value based upon defined product criteria.
The Company chooses to fair value these residential mortgage
LHFS to eliminate the complexities and inherent difficulties of
achieving hedge accounting and to better align reported results
with the underlying economic changes in value of the loans and
related hedge instruments. Any origination fees are recognized
within Mortgage production related income in the Consolidated
Statements of Income when earned at the time of closing. The
servicing value is included in the fair value of the loan and is
initially recognized at the time the Company enters into IRLCs
with borrowers. The Company employs derivative instruments
to economically hedge changes in interest rates and the related
impact on servicing value in the fair value of the loan. The mark-
to-market adjustments related to LHFS and the associated
economic hedges are captured in Mortgage production related
income.
LHFS classified as level 2 are primarily agency loans which
trade in active secondary markets and are priced using current
market pricing for similar securities, adjusted for servicing,
interest rate risk, and credit risk. Non-agency residential
mortgage LHFS are also included in level 2. The Company
transferred certain residential mortgage LHFS into level 3 during
the years ended December 31, 2017 and 2016. These transfers
were largely due to borrower defaults or the identification of
other loan defects impacting the marketability of the loans. At
December 31, 2017, the Company had no residential mortgage
LHFS classified as level 3 AFS as these loans were sold or
transferred out of level 3 during 2017.
For residential mortgages that the Company has elected to
measure at fair value, the Company recognized an immaterial
amount of gains/(losses) in the Consolidated Statements of
Income due to changes in fair value attributable to borrower-
specific credit risk for each of the years ended December 31,
2017, 2016, and 2015. In addition to borrower-specific credit
risk, there are other more significant variables that drive changes
in the fair values of the loans, including interest rates and general
market conditions.
Commercial Mortgage LHFS
The Company values certain commercial mortgage LHFS at fair
value based upon observable current market prices for similar
loans. These loans are generally transferred to agencies within
90 days of origination. The Company had commitments from
agencies to purchase these loans at December 31, 2017 and 2016;
therefore, they are classified as level 2. Origination fees are
recognized within commercial real estate related income in the
Consolidated Statements of Income when earned at the time of
closing. To mitigate the effect of interest rate risk inherent in
entering into IRLCs with borrowers, the Company enters into
forward contracts with investors at the same time that it enters
into IRLCs with borrowers. The mark-to-market adjustments
related to commercial mortgage LHFS, IRLCs, and forward
contracts are recognized in Commercial real estate related
income. For commercial mortgages that the Company has
elected to measure at fair value, the Company recognized no
gains/(losses) in the Consolidated Statements of Income due to
changes in fair value attributable to borrower-specific credit risk
for each the years ended December 31, 2017, 2016, and 2015.
LHFI
LHFI classified as level 3 includes predominantly mortgage
loans that are not marketable, largely due to the identification of
loan defects. The Company chooses to measure these mortgage
LHFI at fair value to better align reported results with the
underlying economic changes in value of the loans and any
related hedging instruments. The Company values these loans
using a discounted cash flow approach based on assumptions
that are generally not observable in current markets, such as
prepayment speeds, default rates, loss severity rates, and
discount rates. Level 3 LHFI also includes mortgage loans that
are valued using collateral based pricing. Changes in the
applicable housing price index since the time of the loan
origination are considered and applied to the loan's collateral
value. An additional discount representing the return that a buyer
would require is also considered in the overall fair value.
Residential Mortgage Servicing Rights
The Company records residential MSR assets at fair value using
a discounted cash flow approach. The fair values of residential
MSRs are impacted by a variety of factors, including prepayment
145
Notes to Consolidated Financial Statements, continued
assumptions, discount rates, delinquency rates, contractually
specified servicing fees, servicing costs, and underlying
portfolio characteristics. The underlying assumptions and
estimated values are corroborated by values received from
independent third parties based on their review of the servicing
portfolio, and comparisons to market transactions. Because these
inputs are not transparent in market trades, residential MSRs are
classified as level 3 assets. For additional information see Note
9, "Goodwill and Other Intangible Assets."
Liabilities
Trading Liabilities and Derivative Instruments
Trading liabilities are comprised primarily of derivative
contracts, including IRLCs that satisfy the criteria to be treated
as derivative financial instruments, as well as various contracts
(primarily U.S. Treasury securities, corporate and other debt
securities) that the Company uses in certain of its trading
businesses. The Company's valuation methodologies for these
derivative contracts and securities are consistent with those
discussed within the corresponding sections herein under
“Trading Assets and Derivative Instruments and Securities
Available for Sale.”
During the second quarter of 2009, in connection with its
sale of Visa Class B shares, the Company entered into a derivative
contract whereby the ultimate cash payments received or paid,
if any, under the contract are based on the ultimate resolution of
the Litigation involving Visa. The fair value of the derivative is
estimated based on the Company’s expectations regarding the
ultimate
that Litigation. The significant
unobservable inputs used in the fair value measurement of the
derivative involve a high degree of judgment and subjectivity;
accordingly, the derivative liability is classified as level 3. See
Note 16, "Guarantees," for a discussion of the valuation
assumptions.
resolution of
Brokered Time Deposits
The Company has elected to measure certain CDs that contain
embedded derivatives at fair value. This fair value election better
aligns the economics of the CDs with the Company’s risk
management strategies. The Company evaluated, on an
instrument by instrument basis, whether a new issuance would
be measured at fair value.
The Company has classified CDs measured at fair value as
level 2 instruments due to the Company's ability to reasonably
measure all significant inputs based on observable market
variables. The Company employs a discounted cash flow
approach based on observable market interest rates for the term
of the CD and an estimate of the Bank's credit risk. For any
embedded derivative features, the Company uses the same
valuation methodologies as if the derivative were a standalone
derivative, as discussed herein under "Derivative instruments."
Long-term Debt
The Company has elected to measure at fair value certain fixed
rate issuances of public debt that are valued by obtaining price
indications from a third party pricing service and utilizing broker
quotes to corroborate the reasonableness of those marks.
Additionally, information from market data of recent observable
trades and indications from buy side investors, if available, are
taken into consideration as additional support for the value. Due
to the availability of this information, the Company determined
that the appropriate classification for these debt issuances is level
2. The Company utilizes derivative instruments to convert
interest rates on its fixed rate debt to floating rates. The Company
elected to measure certain fixed rate debt issuances at fair value
to align the accounting for the debt with the accounting for
offsetting derivative positions, without having to apply complex
hedge accounting.
146
Notes to Consolidated Financial Statements, continued
The valuation technique and range, including weighted average, of the unobservable inputs associated with the Company's level 3
assets and liabilities are as follows:
(Dollars in millions)
Assets
Trading assets and derivative instruments:
Fair value
December 31,
2017
Level 3 Significant Unobservable Input Assumptions
Valuation Technique
Unobservable Input 1
Range
(weighted average)
Derivative instruments, net 2
$— Internal model
Pull through rate
MSR value
41-100% (81%)
41-190 bps (113 bps)
Securities AFS:
MBS - non-agency residential
ABS
Corporate and other debt securities
Other equity securities
LHFI
Residential MSRs
Third party pricing
59
Third party pricing
8
Cost
5
418
Cost
192 Monte Carlo/
Discounted cash
flow
N/A
N/A
N/A
N/A
Option adjusted spread
Conditional prepayment
rate
62-784 bps (215 bps)
2-34 CPR (11 CPR)
4
Collateral based
pricing
1,710 Monte Carlo/
Discounted cash
flow
Conditional default rate
Appraised value
0-5 CDR (0.7 CDR)
NM 3
Conditional prepayment
rate
6-30 CPR (13 CPR)
Option adjusted spread
1-125% (4%)
1 For certain assets and liabilities where the Company utilizes third party pricing, the unobservable inputs and their ranges are not reasonably available, and therefore,
have been noted as not applicable ("N/A").
2 Amount represents the net of IRLC assets and liabilities and includes the derivative liability associated with the Company's sale of Visa shares. Refer to the "Trading
Liabilities and Derivative Instruments" section herein for a discussion of valuation assumptions related to the Visa derivative liability.
3 Not meaningful.
(Dollars in millions)
Assets
Trading assets and derivative instruments:
Fair value
December 31,
2016
Level 3 Significant Unobservable Input Assumptions
Valuation Technique
Unobservable Input 1
Range
(weighted average)
Derivative instruments, net 2
$6
Internal model
Pull through rate
MSR value
40-100% (81%)
22-170 bps (106 bps)
Securities AFS:
U.S. states and political subdivisions
MBS - non-agency residential
ABS
Corporate and other debt securities
Other equity securities
Residential LHFS
LHFI
Residential MSRs
Cost
4
Third party pricing
74
Third party pricing
10
Cost
5
540
Cost
12 Monte Carlo/
Discounted cash
flow
219 Monte Carlo/
Discounted cash
flow
3
Collateral based
pricing
1,572 Monte Carlo/
Discounted cash
flow
N/A
N/A
N/A
N/A
N/A
Option adjusted spread
Conditional prepayment rate
Conditional default rate
Option adjusted spread
Conditional prepayment rate
Conditional default rate
Appraised value
104-125 bps (124 bps)
2-28 CPR (7 CPR)
0-3 CDR (0.4 CDR)
62-784 bps (184 bps)
3-36 CPR (13 CPR)
0-5 CDR (2.1 CDR)
NM 3
Conditional prepayment rate
1-25 CPR (9 CPR)
Option adjusted spread
0-122% (8%)
1 For certain assets and liabilities where the Company utilizes third party pricing, the unobservable inputs and their ranges are not reasonably available, and therefore,
have been noted as not applicable ("N/A").
2 Amount represents the net of IRLC assets and liabilities and includes the derivative liability associated with the Company's sale of Visa shares. Refer to the "Trading
Liabilities and Derivative Instruments" section herein for a discussion of valuation assumptions related to the Visa derivative liability.
3 Not meaningful.
147
Notes to Consolidated Financial Statements, continued
The following tables present a reconciliation of the beginning
and ending balances for assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs
(other than servicing rights which are disclosed in Note 9,
“Goodwill and Other Intangible Assets”). Transfers into and out
of the fair value hierarchy levels are assumed to occur at the end
of the period in which the transfer occurred. None of the transfers
into or out of level 3 have been the result of using alternative
valuation approaches to estimate fair values. There were no
transfers between level 1 and 2 during the years ended December
31, 2017 and 2016.
Fair Value Measurements
Using Significant Unobservable Inputs
Beginning
Balance
January 1,
2017
Included
in
Earnings
OCI
Purchases
Sales
Settlements
Transfers
to/from
Other
Balance
Sheet
Line Items
Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value
December 31,
2017
Included in
Earnings
(held at
December 31,
2017 1)
$6
4
74
10
5
540
633
12
222
$185 2
$—
$—
$—
$—
($191)
$—
$—
$—
$12 2
—
(1)
—
—
1
—
—
—
—
1 3
1 3
—
(1) 3
1 3
—
—
—
—
—
—
75
75
—
—
—
—
—
—
(1)
(1)
(25)
—
(4)
(15)
(3)
—
(191)
(213)
(1)
(34)
—
—
—
—
—
—
(4)
3
—
—
—
—
—
—
26
5
—
—
—
—
(5)
(5)
(8)
—
—
59
8
5
418
490
—
196
—
(1)
—
—
—
(1)
—
(1) 4
(Dollars in millions)
Assets
Trading assets:
Derivative
instruments, net
Securities AFS:
U.S. states and
political
subdivisions
MBS - non-agency
residential
ABS
Corporate and other
debt securities
Other equity
securities
Total securities AFS
Residential LHFS
LHFI
1 Change in unrealized gains/(losses) included in earnings during the period related to financial assets still held at December 31, 2017.
2 Includes issuances, fair value changes, and expirations. Amount related to residential IRLCs is recognized in Mortgage production related income, amount related
to commercial IRLCs is recognized in Commercial real estate related income, and amount related to Visa derivative liability is recognized in Other noninterest
expense.
3 Amounts recognized in OCI are included in change in net unrealized gains on securities AFS, net of tax.
4 Amounts are generally included in Mortgage production related income; however, the mark on certain fair value loans is included in Other noninterest income.
148
Notes to Consolidated Financial Statements, continued
Fair Value Measurements
Using Significant Unobservable Inputs
Beginning
Balance
January 1,
2016
Included
in
Earnings
OCI
Purchases
Sales
Settlements
Transfers to/
from Other
Balance
Sheet
Line Items
Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value
December 31,
2016
Included in
Earnings
(held at
December 31,
2016 1)
$89
15
104
5
94
12
5
440
556
5
257
23
($1) 2
$—
$— ($88)
$—
198 3
197
—
—
—
—
—
—
(1) 5
(2) 5
—
—
—
—
1 4
1 4
—
—
2 4
—
—
—
2
2
—
—
—
—
308
308
—
—
—
—
(88)
—
—
—
—
—
—
(35)
—
—
2
2
(1)
(21)
(3)
—
(208)
(233)
—
(44)
(23)
$—
(211)
(211)
—
—
—
—
—
—
(5)
1
—
$—
—
—
—
—
—
—
—
—
52
10
—
$—
—
—
—
—
—
—
—
—
(4)
—
—
$—
6
6
4
74
10
5
540
633
12
222
—
$—
7 3
7
—
—
—
—
—
—
(1) 5
(2) 5
—
(Dollars in millions)
Assets
Trading assets:
Corporate and other
debt securities
Derivative
instruments, net
Total trading assets
Securities AFS:
U.S. states and
political
subdivisions
MBS - non-agency
residential
ABS
Corporate and other
debt securities
Other equity
securities
Total securities AFS
Residential LHFS
LHFI
Liabilities
Other liabilities
1 Change in unrealized gains/(losses) included in earnings during the period related to financial assets/liabilities still held at December 31, 2016.
2 Amounts included in earnings are recognized in Trading income.
3 Includes issuances, fair value changes, and expirations. Amount related to residential IRLCs is recognized in Mortgage production related income and amount
related to Visa derivative liability is recognized in Other noninterest expense.
4 Amounts recognized in OCI are included in change in net unrealized gains/(losses) on securities AFS, net of tax.
5 Amounts are generally included in Mortgage production related income; however, the mark on certain fair value loans is included in Other noninterest income.
149
Notes to Consolidated Financial Statements, continued
Non-recurring Fair Value Measurements
The following tables present losses recognized on assets still
held at period end, and measured at fair value on a non-recurring
basis, for the year ended December 31, 2017 and the year ended
December 31, 2016. Adjustments to fair value generally result
(Dollars in millions)
LHFS
LHFI
OREO
Other assets
(Dollars in millions)
LHFI
OREO
Other assets
December 31, 2017
$13
49
24
53
December 31, 2016
$75
17
112
from the application of LOCOM or through write-downs of
individual assets. The tables do not reflect changes in fair value
attributable to economic hedges the Company may have used to
mitigate interest rate risk associated with LHFS.
Fair Value Measurements
Level 1
Level 2
Level 3
Losses for the
Year Ended
December 31, 2017
$—
—
—
—
$13
—
1
4
$—
49
23
49
$—
—
(4)
(43)
Fair Value Measurements
Level 1
Level 2
Level 3
Losses for the
Year Ended
December 31, 2016
$—
—
—
$—
—
58
$75
17
54
$—
(2)
(36)
Discussed below are the valuation techniques and inputs used in estimating fair values for assets measured at fair value on a non-
recurring basis and classified as level 2 and/or 3.
Loans Held for Sale
At December 31, 2017, LHFS classified as level 2 consisted of
commercial loans that were valued using market prices and
measured at LOCOM. During the year ended December 31,
2017, the Company transferred $31 million of C&I NPLs to
LHFS as the Company elected to actively market these loans for
sale. As a result of transferring the C&I NPLs to LHFS, the
Company recognized a $5 million charge-off to reflect the loans'
estimated market value. These transferred C&I NPLs were sold
during the fourth quarter of 2017 at a price approximating their
carrying values. There were no gains/(losses) recognized in
earnings during the year ended December 31, 2017 as the charge-
offs related to these loans are a component of the ALLL.
Loans Held for Investment
At December 31, 2017 and 2016, LHFI consisted primarily of
consumer loans discharged in Chapter 7 bankruptcy that had not
been reaffirmed by the borrower, as well as nonperforming CRE
loans for which specific reserves had been recognized. Cash
proceeds from the sale of the underlying collateral is the expected
source of repayment for a majority of these loans. Accordingly,
the fair value of these loans is derived from the estimated fair
value of the underlying collateral, incorporating market data if
available. There were no gains/(losses) recognized during the
year ended December 31, 2017 or during the year ended
December 31, 2016, as the charge-offs related to these loans are
a component of the ALLL. Due to the lack of market data for
similar assets, all of these loans are classified as level 3.
OREO
OREO is measured at the lower of cost or fair value less costs
to sell. Level 2 OREO consists primarily of residential homes,
commercial properties, and vacant lots and land for which
binding purchase agreements exist. Level 3 OREO consists
primarily of residential homes, commercial properties, and
vacant lots and land for which initial valuations are based on
property-specific appraisals, broker pricing opinions, or other
limited, highly subjective market information. Updated value
estimates are received regularly for level 3 OREO.
Other Assets
Other assets consists of cost and equity method investments,
other repossessed assets, assets under operating leases where the
Company is the lessor, branch properties, land held for sale, and
software.
Investments in cost and equity method investments are
evaluated for potential impairment based on the expected
remaining cash flows to be received from these assets discounted
at a market rate that is commensurate with the expected risk,
considering relevant Company-specific valuation multiples,
where applicable. Based on the valuation methodology and
associated unobservable inputs, these investments are classified
as level 3. During the year ended December 31, 2017, the
Company recognized an immaterial amount of impairment
charges on is equity investments. During the year ended
December 31, 2016, the Company recognized impairment
charges of $8 million on its equity investments.
Other repossessed assets comprises repossessed personal
property that is measured at fair value less cost to sell. These
assets are classified as level 3 as their fair value is determined
based on a variety of subjective, unobservable factors. There
were no losses recognized in earnings by the Company on other
repossessed assets during the year ended December 31, 2017 or
during the year ended December 31, 2016, as the impairment
charges on repossessed personal property were a component of
the ALLL.
The Company monitors the fair value of assets under
operating leases where the Company is the lessor and recognizes
impairment on the leased asset to the extent the carrying value
is not recoverable and is greater than its fair value. Fair value is
determined using collateral specific pricing digests, external
appraisals, broker opinions, recent sales data from industry
150
Notes to Consolidated Financial Statements, continued
equipment dealers, and the discounted cash flows derived from
the underlying lease agreement. As market data for similar assets
and lease arrangements is available and used in the valuation,
these assets are considered level 2. The Company recognized an
immaterial amount of impairment charges during the year ended
December 31, 2017 attributable to changes in the fair value of
various personal property under operating leases. During the year
ended December 31, 2016, the Company recognized impairment
charges of $12 million attributable to changes in the fair value
of various personal property under operating leases.
Branch properties are classified as level 3, as their fair value
is based on market comparables and broker opinions. During the
year ended December 31, 2017 and 2016, the Company
recognized impairment charges of $10 million and $12 million
on branch properties, respectively.
Land held for sale is recorded at the lesser of carrying value
or fair value less cost to sell, and is considered level 3 as its fair
value is determined based on market comparables and broker
opinions. The Company recognized an immaterial amount of
impairment charges on land held for sale for each of the years
ended December 31, 2017 and 2016.
Software consisted primarily of external software licenses
and internally developed software classified as level 3, as their
fair value is based on unobservable vendor pricing and
capitalized software development costs. The Company
recognized impairment charges of $28 million during the year
ended December 31, 2017. During the year ended December 31,
2016, the Company recognized no impairment charges on
software.
Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments are as follows:
(Dollars in millions)
Financial assets:
Cash and cash equivalents
Trading assets and derivative instruments
Securities AFS
LHFS
LHFI, net
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Trading liabilities and derivative instruments
(Dollars in millions)
Financial assets:
Cash and cash equivalents
Trading assets and derivative instruments
Securities AFS
LHFS
LHFI, net
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Trading liabilities and derivative instruments
December 31, 2017
Carrying
Amount
Fair
Value
Fair Value Measurements
Level 1
Level 2
Level 3
$6,912
5,093
31,416
2,290
$6,912
5,093
31,416
2,293
141,446
141,575
160,780
160,586
4,781
9,785
1,283
4,781
9,892
1,283
$6,912
608
4,382
—
—
—
—
—
769
$—
4,469
26,544
2,239
—
160,586
4,781
8,834
498
$— (a)
16 (b)
490 (b)
54 (c)
141,575 (d)
— (e)
— (f)
1,058 (f)
16 (b)
December 31, 2016
Carrying
Amount
Fair
Value
Fair Value Measurements
Level 1
Level 2
Level 3
$6,423
6,067
30,672
4,169
$6,423
6,067
30,672
4,178
141,589
140,516
160,398
4,764
11,748
1,351
160,280
4,764
11,779
1,351
$6,423
881
5,507
—
—
—
—
—
846
$—
5,158
24,532
4,161
282
160,280
4,764
11,051
483
$— (a)
28 (b)
633 (b)
17 (c)
140,234 (d)
— (e)
— (f)
728 (f)
22 (b)
The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:
(a) Cash and cash equivalents are valued at their carrying
amounts, which are reasonable estimates of fair value due
to the relatively short period to maturity of the instruments.
(b) Trading assets and derivative instruments, securities AFS,
and trading liabilities and derivative instruments that are
classified as level 1 are valued based on quoted prices
observed in active markets. For those instruments classified
as level 2 or 3, refer to the respective valuation discussions
within this footnote.
(c) LHFS are generally valued based on observable current
market prices or, if quoted market prices are not available,
quoted market prices of similar instruments. Refer to the
LHFS section within this footnote for further discussion.
When valuation assumptions are not readily observable in
151
Notes to Consolidated Financial Statements, continued
the market, instruments are valued based on the best
available data to approximate fair value. This data may be
internally developed and considers risk premiums that a
market participant would require under then-current market
conditions.
(d) LHFI fair values are based on a hypothetical exit price,
which does not represent the estimated intrinsic value of the
loan if held for investment. The assumptions used are
expected to approximate those that a market participant
purchasing the loans would use to value the loans, including
a market risk premium and liquidity discount. Estimating
the fair value of the loan portfolio when loan sales and
trading markets are illiquid or nonexistent requires
significant judgment.
Generally, the Company measures fair value for LHFI
based on estimated future discounted cash flows using
current origination rates for loans with similar terms and
credit quality, which derived an estimated value of 101% on
the loan portfolio’s net carrying value at both December 31,
2017 and 2016. The value derived from origination rates
likely does not represent an exit price; therefore, an
incremental market risk and liquidity discount was applied
when estimating the fair value of these loans. The discounted
value is a function of a market participant’s required yield
in the current environment and is not a reflection of the
expected cumulative losses on the loans.
(e) Deposit liabilities with no defined maturity such as DDAs,
NOW/money market accounts, and savings accounts have
a fair value equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for
CDs are estimated using a discounted cash flow approach
that applies current interest rates to a schedule of aggregated
expected maturities. The assumptions used in the discounted
cash flow analysis are expected to approximate those that
market participants would use in valuing deposits. The value
of long-term relationships with depositors is not taken into
account in estimating fair values. Refer to the respective
valuation section within this footnote for valuation
information related to brokered time deposits that the
Company measures at fair value as well as those that are
carried at amortized cost.
(f) Fair values for short-term borrowings and certain long-term
debt are based on quoted market prices for similar
instruments or estimated discounted cash flows utilizing the
Company’s current incremental borrowing rate for similar
types of instruments. Refer to the respective valuation
section within this footnote for valuation information related
to long-term debt that the Company measures at fair value.
For level 3 debt, the terms are unique in nature or there are
no similar instruments that can be used to value the
instrument without using
significant unobservable
assumptions.
Unfunded loan commitments and letters of credit are not
included in the table above. At December 31, 2017 and 2016,
the Company had $66.4 billion and $67.2 billion, respectively,
of unfunded commercial loan commitments and letters of credit.
A reasonable estimate of the fair value of these instruments is
the carrying value of deferred fees plus the related unfunded
commitments reserve, which was a combined $84 million and
$71 million at December 31, 2017 and 2016, respectively. No
active trading market exists for these instruments, and the
estimated fair value does not include value associated with the
borrower relationship. The Company does not estimate the fair
values of consumer unfunded lending commitments which can
generally be canceled by providing notice to the borrower.
152
Notes to Consolidated Financial Statements, continued
NOTE 19 – CONTINGENCIES
Litigation and Regulatory Matters
In the ordinary course of business, the Company and its
subsidiaries are parties to numerous civil claims and lawsuits
and subject to regulatory examinations, investigations, and
requests for information. Some of these matters involve claims
for substantial amounts. The Company’s experience has shown
that the damages alleged by plaintiffs or claimants are often
overstated, based on unsubstantiated legal theories, unsupported
by facts, and/or bear no relation to the ultimate award that a court
might grant. Additionally, the outcome of litigation and
regulatory matters and the timing of ultimate resolution are
inherently difficult to predict. These factors make it difficult for
the Company to provide a meaningful estimate of the range of
reasonably possible outcomes of claims in the aggregate or by
individual claim. However, on a case-by-case basis, reserves are
established for those legal claims in which it is probable that a
loss will be incurred and the amount of such loss can be
reasonably estimated. The Company's financial statements at
December 31, 2017 reflect the Company's current best estimate
of probable losses associated with these matters, including costs
to comply with various settlement agreements, where applicable.
The actual costs of resolving these claims may be substantially
higher or lower than the amounts reserved.
these
to range from $0
For a limited number of legal matters in which the Company
is involved, the Company is able to estimate a range of reasonably
possible losses in excess of related reserves, if any. Management
to
losses
currently estimates
approximately $160 million. This estimated range of reasonably
possible losses represents the estimated possible losses over the
life of such legal matters, which may span a currently
indeterminable number of years, and is based on information
available at December 31, 2017. The matters underlying the
estimated range will change from time to time, and actual results
may vary significantly from this estimate. Those matters for
which an estimate is not possible are not included within this
estimated range; therefore, this estimated range does not
represent the Company’s maximum loss exposure. Based on
current knowledge, it is the opinion of management that
liabilities arising from legal claims in excess of the amounts
currently reserved, if any, will not have a material impact on the
Company’s financial condition, results of operations, or cash
flows. However, in light of the significant uncertainties involved
in these matters and the large or indeterminate damages sought
in some of these matters, an adverse outcome in one or more of
these matters could be material to the Company’s financial
condition, results of operations, or cash flows for any given
reporting period.
The following is a description of certain litigation and regulatory
matters:
Card Association Antitrust Litigation
The Company is a defendant, along with Visa and MasterCard,
as well as several other banks, in several antitrust lawsuits
challenging their practices. For a discussion regarding the
Company’s involvement in this litigation matter, see Note 16,
“Guarantees.”
153
Bickerstaff v. SunTrust Bank
This case was filed in the Fulton County State Court on July 12,
2010, and an amended complaint was filed on August 9, 2010.
Plaintiff asserts that all overdraft fees charged to his account
which related to debit card and ATM transactions are actually
interest charges and therefore subject to the usury laws of Georgia.
Plaintiff has brought claims for violations of civil and criminal
usury laws, conversion, and money had and received, and
purports to bring the action on behalf of all Georgia citizens who
incurred such overdraft fees within the four years before the
complaint was filed where the overdraft fee resulted in an interest
rate being charged in excess of the usury rate. On April 8, 2013,
the plaintiff filed a motion for class certification and that motion
was denied but the ruling was later reversed and remanded by the
Georgia Supreme Court. On October 6, 2017, the trial court
granted plaintiff's motion for class certification and the Bank filed
an appeal of the decision on November 3, 2017.
ERISA Class Actions
Company Stock Class Action
Beginning in July 2008, the Company and certain officers,
directors, and employees of the Company were named in a class
action alleging that they breached their fiduciary duties under
ERISA by offering the Company's common stock as an
investment option in the SunTrust Banks, Inc. 401(k) Plan (the
“Plan”). The plaintiffs sought to represent all current and former
Plan participants who held the Company stock in their Plan
accounts from May 15, 2007 to March 30, 2011 and seek to
recover alleged losses these participants supposedly incurred as
a result of their investment in Company stock.
This case was originally filed in the U.S. District Court for
the Southern District of Florida but was transferred to the U.S.
District Court for the Northern District of Georgia, Atlanta
Division (the “District Court”), in November 2008. Since the
filing of the case, various amended pleadings, motions, and
appeals were made by the parties that ultimately resulted in the
District Court granting a motion for summary judgment for
certain non-fiduciary defendants and granting certain of the
plaintiffs' motion for class certification. The class is defined as
"All persons, other than Defendants and members of their
immediate families, who were participants in or beneficiaries of
the SunTrust Banks, Inc. 401(k) Savings Plan (the "Plan") at any
time between May 15, 2007 and March 30, 2011, inclusive (the
"Class Period") and whose accounts included investments in
SunTrust common stock ("SunTrust Stock") during that time
period and who sustained a loss to their account as a result of
the investment in SunTrust Stock." Discovery has closed in the
matter. On February 22, 2018, the Company informed the
District Court that it had reached an agreement in principle with
class counsel to settle this class action, subject to court approval.
Mutual Funds Class Actions
On March 11, 2011, the Company and certain officers, directors,
and employees of the Company were named in a putative class
action alleging that they breached their fiduciary duties under
ERISA by offering certain STI Classic Mutual Funds as
investment options in the Plan. The plaintiffs purport to represent
all current and former Plan participants who held the STI Classic
Mutual Funds in their Plan accounts from April 2002 through
Notes to Consolidated Financial Statements, continued
December 2010 and seek to recover alleged losses these Plan
participants supposedly incurred as a result of their investment
in the STI Classic Mutual Funds. This action is pending in the
U.S. District Court for the Northern District of Georgia, Atlanta
Division (the “District Court”). Subsequently, plaintiffs' counsel
initiated a substantially similar lawsuit against the Company
naming two new plaintiffs. On June 27, 2014, Brown, et al. v.
SunTrust Banks, Inc., et al., another putative class action alleging
breach of fiduciary duties associated with the inclusion of STI
Classic Mutual Funds as investment options in the Plan, was
filed in the U.S. District Court for the District of Columbia but
then was transferred to the District Court.
After various appeals, the cases were remanded to the
District Court. On March 25, 2016, a consolidated amended
complaint was filed, consolidating all of these pending actions
into one case. The Company filed an answer to the consolidated
amended complaint on June 6, 2016. Subsequent to the closing
of fact discovery, plaintiffs filed their second amended
consolidated complaint on December 19, 2017 which among
other things named five new defendants. On January 2, 2018,
the second amended
defendants filed
consolidated complaint.
their answer
to
Intellectual Ventures II v. SunTrust Banks, Inc. and
SunTrust Bank
This action was filed in the U.S. District Court for the Northern
District of Georgia on July 24, 2013. Plaintiff alleged that
SunTrust violates five patents held by plaintiff in connection with
SunTrust’s provision of online banking services and other
systems and services. Plaintiff seeks damages for alleged patent
infringement of an unspecified amount, as well as attorney’s fees
and expenses. The matter was stayed on October 7, 2014 pending
inter partes reviews of a number of the claims asserted against
SunTrust. After completion of those reviews, plaintiff dismissed
its claims regarding four of the five patents on August 1, 2017.
Consent Order with the Federal Reserve
On April 13, 2011, SunTrust, SunTrust Bank, and STM entered
into a Consent Order with the FRB in which SunTrust, SunTrust
Bank, and STM agreed to strengthen oversight of, and improve
risk management, internal audit, and compliance programs
concerning the residential mortgage loan servicing, loss
mitigation, and foreclosure activities of STM. On January 12,
2018, the FRB terminated the Consent Order without penalty,
finding
the Company has demonstrated sustained
improvements in oversight and mortgage loan servicing and
foreclosure practice.
that
United States Mortgage Servicing Settlement
In the second quarter of 2014, STM and the U.S., through the
DOJ, HUD, and Attorneys General for several states, reached a
final settlement agreement related to the National Mortgage
Servicing Settlement. The settlement agreement became
effective on September 30, 2014 when the court entered the
Consent Judgment. Pursuant to the settlements, STM made $50
million in cash payments, provided $500 million of consumer
relief, and implemented certain mortgage servicing standards.
In an August 10, 2017 report, the independent Office of Mortgage
Settlement Oversight ("OMSO"), appointed to review and
certify compliance with the provisions of the settlement,
154
confirmed that the Company fulfilled its consumer relief
commitments of the settlement. STM's compliance with certain
mortgage servicing standards continues to be monitored, tested,
and reported quarterly by an internal review group and semi-
annually by the OMSO. The Company does not expect costs
associated with remaining servicing standard obligations to have
a material impact on the Company's financial results.
United States Attorney’s Office for the Southern District of
New York Foreclosure Expense Investigation
In April 2013, STM began cooperating with the United States
Attorney's Office for the Southern District of New York (the
"Southern District") in a broad-based industry investigation
regarding claims for foreclosure-related expenses charged by
law firms in connection with the foreclosure of loans guaranteed
or insured by Fannie Mae, Freddie Mac, or FHA. The
investigation relates to a private litigant qui tam lawsuit filed
under seal and remains in early stages. The Southern District has
not yet advised STM how it will proceed in this matter. The
Southern District and STM engaged in dialogue regarding
potential resolution of this matter as part of the National
Mortgage Servicing Settlement, but were unable to reach
agreement.
LR Trust v. SunTrust Banks, Inc., et al.
In November 2016, the Company and certain officers and
directors were named as defendants in a shareholder derivative
action alleging that defendants failed to take action related to
activities at issue in the National Mortgage Servicing, HAMP,
and FHA Originations settlements, and certain other legal
matters or to ensure that the alleged activities in each were
remedied and otherwise appropriately addressed. Plaintiff
sought an award in favor of the Company for the amount of
damages sustained by the Company, disgorgement of alleged
benefits obtained by defendants, and enhancements to corporate
governance and internal controls. On September 18, 2017, the
court dismissed this matter and on October 16, 2017, Plaintiff
filed an appeal.
Millennium Lender Claim Trust v. STRH and SunTrust
Bank, et al.
In August 2017, the Trustee of the Millennium Lender Claim
Trust filed a suit in the New York State Court against STRH,
SunTrust Bank, and other lenders of the $1.775 B Millennium
Health LLC f/k/a Millennium Laboratories LLC (“Millennium”)
syndicated loan. The Trustee alleges that the loan was actually
a security and that defendants misrepresented or omitted to state
material facts in the offering materials and communications
provided concerning the legality of Millennium's sales,
marketing, and billing practices and the known risks posed by a
pending government investigation into the illegality of such
practices. The Trustee brings claims for violation of the
California Corporate Securities Law, the Massachusetts Uniform
Securities Act, the Colorado Securities Act, and the Illinois
Securities Law, as well as negligent misrepresentation and seeks
rescission of sales of securities as well as unspecified rescissory
damages, compensatory damages, punitive damages, interest,
and attorneys' fees and costs. The defendants have removed the
case to the U.S. District Court for the Southern District of New
York.
Notes to Consolidated Financial Statements, continued
NOTE 20 - BUSINESS SEGMENT REPORTING
The Company operates and measures business activity across
two segments: Consumer and Wholesale, with functional
activities included in Corporate Other. In the second quarter of
2017, the Company realigned its business segment structure from
three segments to two segments based on, among other things,
the manner in which financial information is evaluated by
in conjunction with Company-wide
management and
organizational changes that were announced during the first
quarter of 2017. Specifically, the Company retained the previous
composition of the Wholesale Banking segment and changed the
basis of presentation of the Consumer Banking and Private
Wealth Management segment and Mortgage Banking segment
such that those segments were combined into a single Consumer
segment.
The following is a description of the segments and their
primary businesses at December 31, 2017.
The Consumer segment is made up of four primary businesses:
• Consumer Banking provides services
to
individual
consumers and branch-managed small business clients
through an extensive network of traditional and in-store
branches, ATMs, the internet (www.suntrust.com), mobile
banking, and by telephone (1-800-SUNTRUST). Financial
products and services offered to consumers and small
business clients include deposits and payments, loans, and
various fee-based services. Consumer Banking also serves
as an entry point for clients and provides services for other
businesses.
the
• Consumer Lending offers an array of lending products to
individual consumers and small business clients via the
Company's Consumer Banking and PWM businesses,
through
and
www.lightstream.com), as well as through various national
offices and partnerships. Products offered include home
equity lines, personal credit lines and loans, direct auto,
indirect auto, student lending, credit cards, and other lending
products.
(www.suntrust.com
internet
•
PWM provides a full array of wealth management products
and professional services to individual consumers and
institutional clients, including loans, deposits, brokerage,
professional investment advisory, and trust services to
clients seeking active management of their financial
resources. Institutional clients are served by the Institutional
Investment Solutions business. Discount/online and full-
service brokerage products are offered to individual clients
through STIS. Investment advisory products and services
are offered to clients by STAS, an SEC registered investment
advisor. PWM also includes GFO, which provides family
office solutions to ultra-high net worth individuals and their
families. Utilizing teams of multi-disciplinary specialists
with expertise in investments, tax, accounting, estate
planning, and other wealth management disciplines, GFO
helps clients manage and sustain wealth across multiple
generations.
• Mortgage Banking offers residential mortgage products
nationally through its retail and correspondent channels, the
internet (www.suntrust.com), and by telephone (1-800-
155
SUNTRUST). These products are either sold in the
secondary market, primarily with servicing rights retained,
or held in the Company’s loan portfolio. Mortgage Banking
also services loans for other investors, in addition to loans
held in the Company’s loan portfolio.
The Wholesale segment is made up of three primary businesses
and the Treasury & Payment Solutions product group:
• CIB delivers comprehensive capital markets solutions,
including advisory, capital raising, and financial risk
management, with the goal of serving the needs of both
public and private companies in the Wholesale segment and
PWM business. Investment Banking and Corporate
Banking teams within CIB serve clients across the nation,
offering a full suite of traditional banking and investment
banking products and services to companies with annual
revenues typically greater than $150 million. Investment
Banking serves select
including
consumer and retail, energy, technology, financial services,
healthcare, industrials, and media and communications.
Corporate Banking serves clients across diversified industry
sectors based on size, complexity, and frequency of capital
markets issuance. Also managed within CIB is the
Equipment Finance Group, which provides lease financing
solutions (through SunTrust Equipment Finance &
Leasing).
industry segments
• Commercial & Business Banking offers an array of
traditional banking products, including lending, cash
management and investment banking solutions via STRH
to commercial clients (generally clients with revenues
between $1 million and $250 million), not-for-profit
organizations, and governmental entities, as well as auto
dealer financing (floor plan inventory financing).
On December 1, 2017, the Company completed the
sale of PAC, its commercial lines insurance premium
finance subsidiary. For all periods presented, the
financial results of PAC, including the gain on the
sale, are reflected in the Wholesale segment. See
Note 2, "Acquisitions/Dispositions," for additional
information related to the sale of PAC.
• Commercial Real Estate provides a full range of financial
solutions for commercial real estate developers, owners, and
including construction, mini-perm, and
operators,
permanent real estate financing, as well as tailored financing
and equity investment solutions via STRH. Commercial
Real Estate also provides multi-family agency lending and
servicing, as well as loan administration, advisory, and
commercial mortgage brokerage services via Pillar. The
Institutional Property Group business targets relationships
with REITs, pension fund advisors, private funds,
homebuilders, and insurance companies and the Regional
business focuses on private real estate owners and
developers
structure.
Commercial Real Estate also offers tailored financing and
equity investment solutions for community development
and affordable housing projects through STCC, with
regional delivery
through a
Notes to Consolidated Financial Statements, continued
• Noninterest income – includes federal and state tax credits
that are grossed-up on a pre-tax equivalent basis, related
primarily to certain community development investments.
• Provision for income taxes-FTE – is calculated using a
blended income tax rate for each segment and includes
reversals of the tax adjustments and credits described above.
The difference between the calculated Provision for income
taxes at the segment level and the consolidated Provision
for income taxes is reported as reconciling items.
The segment’s financial performance is comprised of direct
financial results and allocations for various corporate functions
that provide management an enhanced view of the segment’s
financial performance.
the
following:
Internal allocations
include
• Operational costs – expenses are charged to segments
based on a methodical activity-based costing process, which
also allocates residual expenses to the segments. Generally,
recoveries of these costs are reported in Corporate Other.
•
Support and overhead costs – expenses not directly
attributable to a specific segment are allocated based on
various drivers (number of equivalent employees, number
of PCs/laptops, net revenue, etc.). Recoveries for these
allocations are reported in Corporate Other.
The application and development of management reporting
methodologies is an active process and undergoes periodic
enhancements. The implementation of these enhancements to
the internal management reporting methodology may materially
affect the results disclosed for each segment, with no impact on
consolidated results. If significant changes to management
reporting methodologies take place, the impact of these changes
is quantified and prior period information is revised, when
practicable.
In the second quarter of 2017, in conjunction with the
aforementioned business segment structure realignment, the
Company made certain adjustments to its internal funds transfer
pricing methodology. Prior period information was revised to
conform to the new business segment structure and the updated
internal funds transfer pricing methodology.
particular expertise in Low Income Housing Tax Credits and
New Market Tax Credits.
• Treasury & Payment Solutions provides Wholesale clients
with services required to manage their payments and
receipts, combined with the ability to manage and optimize
their deposits across all aspects of their business. Treasury
& Payment Solutions operates all electronic and paper
payment types, including card, wire transfer, ACH, check,
and cash. It also provides clients the means to manage their
accounts electronically online, both domestically and
internationally.
instruments, short-term
Corporate Other includes management of the Company’s
investment securities portfolio, long-term debt, end user
derivative
liquidity and funding
activities, balance sheet risk management, and most real estate
assets. Additionally, Corporate Other includes the Company's
functional activities such as marketing, SunTrust online, human
resources, finance, ER, legal and compliance, communications,
procurement, enterprise information services, corporate real
estate, and executive management.
Because business segment results are presented based on
management accounting practices,
the
consolidated results prepared under U.S. GAAP creates certain
differences, which are reflected in Reconciling Items. Business
segment reporting conventions are described below:
transition
the
to
• Net interest income-FTE – is reconciled from Net interest
income and is grossed-up on an FTE basis to make income
from tax-exempt assets comparable to other taxable
products. Segment results reflect matched maturity funds
transfer pricing, which ascribes credits or charges based on
the economic value or cost created by assets and liabilities
of each segment. Differences between these credits and
charges are captured as reconciling items. The change in this
variance is generally attributable to corporate balance sheet
management strategies.
• Provision for credit losses – represents net charge-offs by
segment combined with an allocation to the segments for
the provision attributable to each segment's quarterly change
in the ALLL and Unfunded commitments reserve balances.
156
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Balance Sheets:
Average LHFI
Average consumer and commercial deposits
Average total assets
Average total liabilities
Average total equity
Statements of Income:
Net interest income
FTE adjustment
Net interest income-FTE 1
Provision for credit losses 2
Net interest income after provision for credit losses-FTE
Total noninterest income
Total noninterest expense
Income before provision for income taxes-FTE
Provision for income taxes-FTE 3, 4
Net income including income attributable to noncontrolling interest
Less: Net income attributable to noncontrolling interest
Net income
Year Ended December 31, 2017
Corporate
Other
Reconciling
Items
Wholesale
Consolidated
$71,521
56,618
85,227
62,291
—
$76
175
34,567
14,610
—
($3)
(64)
2,630
(28)
24,301
$144,216
159,549
204,931
180,630
24,301
Consumer
$72,622
102,820
82,507
103,757
—
$3,698
$2,247
($44)
($268)
$5,633
—
3,698
368
3,330
1,874
3,842
1,362
491
871
—
$871
142
2,389
41
2,348
1,710
1,869
2,189
816
1,373
—
$1,373
3
(41)
—
(41)
(33)
73
(147)
(355)
208
9
$199
—
(268)
—
(268)
(197)
(20)
(445)
(275)
(170)
—
145
5,778
409
5,369
3,354
5,764
2,959
677
2,282
9
($170)
$2,273
1 Presented on a matched maturity funds transfer price basis for the segments.
2 Provision for credit losses represents net charge-offs by segment combined with an allocation to the segments for the provision attributable to quarterly changes in
the ALLL and Unfunded commitment reserve balances.
3 Includes regular Provision for income taxes as well as FTE income and tax credit adjustment reversals.
4 Tax effects resulting from the 2017 Tax Act are included in Corporate Other.
(Dollars in millions)
Balance Sheets:
Average LHFI
Average consumer and commercial deposits
Average total assets
Average total liabilities
Average total equity
Statements of Income:
Net interest income
FTE adjustment
Net interest income-FTE 2
Provision for credit losses 3
Net interest income after provision for credit losses-FTE
Total noninterest income
Total noninterest expense
Income before provision for income taxes-FTE
Provision for income taxes-FTE 4
Net income including income attributable to noncontrolling interest
Less: Net income attributable to noncontrolling interest
Net income
Year Ended December 31, 2016 1
Corporate
Other
Reconciling
Items
Wholesale
Consolidated
$71,600
54,713
85,494
60,438
—
$66
124
31,952
14,148
—
($3)
(72)
2,440
(73)
24,068
$141,118
154,189
199,004
174,936
24,068
Consumer
$69,455
99,424
79,118
100,423
—
$3,465
$2,018
$101
($363)
$5,221
—
3,465
172
3,293
2,036
3,796
1,533
568
965
—
$965
136
2,154
272
1,882
1,356
1,676
1,562
583
979
—
$979
2
103
—
103
138
13
228
59
169
9
—
(363)
—
(363)
(147)
(17)
(493)
(267)
(226)
—
138
5,359
444
4,915
3,383
5,468
2,830
943
1,887
9
$160
($226)
$1,878
1 Beginning in the second quarter of 2017, the Company realigned its business segment structure from three segments to two segments. Specifically, the Company
retained the previous composition of the Wholesale Banking segment and changed the basis of presentation of the Consumer Banking and Private Wealth Management
segment and Mortgage Banking segment such that those segments were combined into a single Consumer segment. Accordingly, business segment information
presented for the year ended December 31, 2016 has been revised to conform to the new business segment structure and updated internal funds transfer pricing
methodology for consistent presentation.
2 Presented on a matched maturity funds transfer price basis for the segments.
3 Provision for credit losses represents net charge-offs by segment combined with an allocation to the segments for the provision attributable to quarterly changes in
the ALLL and Unfunded commitment reserve balances.
4 Includes regular Provision for income taxes as well as FTE income and tax credit adjustment reversals.
157
Notes to Consolidated Financial Statements, continued
(Dollars in millions)
Balance Sheets:
Average LHFI
Average consumer and commercial deposits
Average total assets
Average total liabilities
Average total equity
Statements of Income:
Net interest income
Consumer
Year Ended December 31, 2015 1
Corporate
Other
Reconciling
Items
Wholesale
$65,637
$67,872
93,789
75,204
94,801
—
50,373
80,903
56,044
—
$60
101
29,668
14,771
—
$3,324
$1,918
$152
FTE adjustment
Net interest income-FTE 2
Provision for credit losses 3
Net interest income after provision for credit losses-FTE
Total noninterest income
Total noninterest expense
Income before provision for income taxes-FTE
Provision for income taxes-FTE 4
Net income including income attributable to noncontrolling interest
Less: Net income attributable to noncontrolling interest
Net income
1
3,325
27
3,298
1,967
3,631
1,634
553
1,081
—
$1,081
138
2,056
137
1,919
1,285
1,523
1,681
628
1,053
—
$1,053
3
155
—
155
137
17
275
81
194
10
$184
Consolidated
$133,558
144,203
188,892
165,546
23,346
$4,764
142
4,906
165
4,741
3,268
5,160
2,849
906
1,943
10
$1,933
($11)
(60)
3,117
(70)
23,346
($630)
—
(630)
1
(631)
(121)
(11)
(741)
(356)
(385)
—
($385)
1 Beginning in the second quarter of 2017, the Company realigned its business segment structure from three segments to two segments. Specifically, the Company
retained the previous composition of the Wholesale Banking segment and changed the basis of presentation of the Consumer Banking and Private Wealth Management
segment and Mortgage Banking segment such that those segments were combined into a single Consumer segment. Accordingly, business segment information
presented for the year ended December 31, 2015 has been revised to conform to the new business segment structure and updated internal funds transfer pricing
methodology for consistent presentation.
2 Presented on a matched maturity funds transfer price basis for the segments.
3 Provision for credit losses represents net charge-offs by segment combined with an allocation to the segments for the provision attributable to quarterly changes in
the ALLL and Unfunded commitment reserve balances.
4 Includes regular Provision for income taxes as well as FTE income and tax credit adjustment reversals.
158
Notes to Consolidated Financial Statements, continued
NOTE 21 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in the components of AOCI, net of tax, are presented in the following table:
(Dollars in millions)
Year Ended December 31, 2017
Balance, beginning of period
Net unrealized (losses)/gains arising during the period
Amounts reclassified to net income
Other comprehensive income/(loss), net of tax
Balance, end of period
Year Ended December 31, 2016
Balance, beginning of period
Cumulative credit risk adjustment 1
Net unrealized (losses)/gains arising during the period
Amounts reclassified to net income
Other comprehensive (loss)/income, net of tax
Balance, end of period
Year Ended December 31, 2015
Balance, beginning of period
Net unrealized (losses)/gains arising during the period
Amounts reclassified to net income
Other comprehensive loss, net of tax
Balance, end of period
Securities
AFS
Derivative
Instruments
Brokered
Time
Deposits
Long-Term
Debt
Employee
Benefit
Plans
Total
($62)
($157)
(7)
68
61
($1)
$135
—
(194)
(3)
(197)
($62)
$298
(150)
(13)
(163)
$135
(31)
(56)
(87)
($244)
$87
—
(91)
(153)
(244)
($157)
$97
154
(164)
(10)
$87
($1)
—
—
—
($1)
$—
—
(1)
—
(1)
($1)
$—
—
—
—
$—
($7)
($594)
3
—
3
11
13
24
($821)
(24)
25
1
($4)
($570)
($820)
$—
(5)
(2)
—
(2)
($7)
$—
—
—
—
$—
($682)
($460)
—
76
12
88
(5)
(212)
(144)
(356)
($594)
($821)
($517)
(174)
9
(165)
($682)
($122)
(170)
(168)
(338)
($460)
1 Related to the Company's early adoption of the ASU 2016-01 provision related to changes in instrument-specific credit risk. See Note 1, "Significant Accounting
Policies," for additional information.
Reclassifications from AOCI to Net income, and the related tax effects, are presented in the following table:
(Dollars in millions)
Year Ended December 31
Details About AOCI Components
2017
2016
2015
Impacted Line Item in the
Consolidated Statements of
Income
Securities AFS:
Realized losses/(gains) on securities AFS
Tax effect
Derivative Instruments:
Employee Benefit Plans:
Realized gains on cash flow hedges
Tax effect
Amortization of prior service credit
Amortization of actuarial loss
Tax effect
$108
(40)
68
(89)
33
(56)
(6)
25
19
(6)
13
($4)
1
(3)
(244)
91
(153)
(6)
25
19
(7)
12
($21) Net securities (losses)/gains
8 Provision for income taxes
(13)
(261)
Interest and fees on loans
held for investment
97 Provision for income taxes
(164)
(6) Employee benefits
21 Employee benefits
15
(6) Provision for income taxes
9
Total reclassifications from AOCI to net income
$25
($144)
($168)
159
Notes to Consolidated Financial Statements, continued
NOTE 22 - PARENT COMPANY FINANCIAL INFORMATION
Statements of Income - Parent Company Only
(Dollars in millions)
Income
Dividends 1
Interest from loans to subsidiaries
Interest from deposits at banks
Other income
Total income
Expense
Interest on short-term borrowings
Interest on long-term debt
Employee compensation and benefits 2
Service fees to subsidiaries
Other expense
Total expense
Income before income tax benefit and equity in undistributed income of subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Total other comprehensive income/(loss), net of tax
Total comprehensive income
1 Substantially all dividend income is from subsidiaries (primarily the Bank).
2 Includes incentive compensation allocations between the Parent Company and subsidiaries.
Year Ended December 31
2017
2016
2015
$1,414
$1,300
$1,159
25
22
5
15
12
2
8
5
9
1,466
1,329
1,181
4
137
103
12
33
289
1,177
72
1,249
1,024
$2,273
1
$2,274
2
140
57
12
24
235
1,094
59
1,153
725
$1,878
(356)
$1,522
1
128
69
6
21
225
956
61
1,017
916
$1,933
(338)
$1,595
160
Notes to Consolidated Financial Statements, continued
Balance Sheets - Parent Company Only
(Dollars in millions)
Assets
Cash held at SunTrust Bank
Interest-bearing deposits held at SunTrust Bank
Interest-bearing deposits held at other banks
Cash and cash equivalents
Securities available for sale
Loans to subsidiaries
Investment in capital stock of subsidiaries stated on the basis of the Company’s equity in
subsidiaries’ capital accounts:
Banking subsidiaries
Nonbanking subsidiaries
Goodwill
Other assets
Total assets
Liabilities
Short-term borrowings:
Subsidiaries
Non-affiliated companies
Long-term debt:
Non-affiliated companies
Other liabilities
Total liabilities
Shareholders’ Equity
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock, at cost, and other
Accumulated other comprehensive loss, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31
2017
2016
$701
2,144
24
2,869
123
1,218
24,590
1,423
211
547
$30,981
$205
350
4,466
909
5,930
2,475
550
9,000
17,540
(3,694)
(820)
25,051
$30,981
$535
1,126
23
1,684
147
2,516
23,617
1,359
211
528
$30,062
$283
483
4,950
831
6,547
1,225
550
9,010
16,000
(2,449)
(821)
23,515
$30,062
161
Notes to Consolidated Financial Statements, continued
Statements of Cash Flows - Parent Company Only
(Dollars in millions)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31
2016
2017
2015
$2,273
$1,878
$1,933
Equity in undistributed income of subsidiaries
Depreciation, amortization, and accretion
Deferred income tax expense/(benefit)
Stock-based compensation
Net securities (gains)/losses
Net increase in other assets
Net increase/(decrease) in other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and paydowns of securities available for sale
Proceeds from sales of securities available for sale
Purchases of securities available for sale
Net decrease/(increase) in loans to subsidiaries
Other, net
Net cash provided by/(used in) investing activities
Cash Flows from Financing Activities:
Net (decrease)/increase in short-term borrowings
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from the issuance of preferred stock
Repurchase of common stock
Repurchase of common stock warrants
Common and preferred dividends paid
Taxes paid related to net share settlement of equity awards
Proceeds from the exercise of stock options
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosures:
Income taxes paid to subsidiaries
Income taxes received by Parent Company
Net income taxes paid by Parent Company
Interest paid
(1,024)
5
5
—
(1)
(15)
122
1,365
38
1
(17)
1,298
—
1,320
(211)
9
(482)
1,239
(1,314)
—
(723)
(39)
21
(1,500)
1,185
1,684
$2,869
($489)
414
($75)
$140
(725)
3
11
3
—
(129)
62
1,103
49
4
(4)
(889)
(3)
(843)
5
2,005
(1,784)
—
(806)
(24)
(564)
(48)
25
(1,191)
(931)
2,615
$1,684
($886)
812
($74)
$135
(916)
6
(4)
11
—
(72)
(28)
930
66
—
(15)
1,042
(2)
1,091
(763)
—
(29)
—
(679)
—
(539)
(36)
17
(2,029)
(8)
2,623
$2,615
($499)
481
($18)
$130
162
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 9.
None.
Rule 13a-15(f) of the Exchange Act) for the Company. The
Company’s internal control over financial reporting is a process
designed under the supervision of the Company’s CEO and CFO
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with
U.S. GAAP.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Management has made a comprehensive review, evaluation,
and assessment of the Company’s internal control over financial
reporting at December 31, 2017. In making its assessment of
internal control over financial reporting, management utilized
the framework issued in 2013 by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in
Internal Control—Integrated Framework. Based on that
assessment, management concluded that, at December 31, 2017,
the Company’s internal control over financial reporting is
effective.
Ernst & Young LLP, the independent registered public
accounting firm that audited our consolidated financial
statements at, and for, the year ended December 31, 2017, has
issued an audit report on the effectiveness of the Company’s
internal control over financial reporting at December 31, 2017.
This audit report issued by Ernst & Young LLP is included in
Item 8 of this Annual Report on Form 10-K.
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management conducted an evaluation, under the
supervision and with the participation of its CEO and CFO, of
the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) at December 31, 2017. The Company’s
disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods
specified in the rules and forms of the SEC, and that such
information
the
Company’s management, including its CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure. Based upon the evaluation, the CEO and CFO
concluded
the Company’s disclosure controls and
procedures were effective at December 31, 2017.
is accumulated and communicated
that
to
Changes in Internal Control over Financial Reporting
There have been no changes to the Company’s internal control
over financial reporting during the year ended December 31,
2017 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Management’s Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in
Item 9B.
OTHER INFORMATION
None.
163
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information at the captions “Equity Compensation Plans,”
and “Stock Ownership of Directors, Management, and Principal
Shareholders” in the registrant’s definitive Proxy Statement for
its 2018 Annual Meeting of Shareholders to be held on April 24,
2018 and to be filed with the SEC is incorporated by reference
into this Item 12.
Item 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information at the captions “Policies and Procedures for
Approval of Related Party Transactions,” “Transactions with
Related Persons, Promoters, and Certain Control Persons,” and
“Corporate Governance and Director Independence” in the
registrant’s definitive Proxy Statement for its 2018 Annual
Meeting of Shareholders to be held on April 24, 2018 and to be
filed with the SEC is incorporated by reference into this Item 13.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The information at the captions “Audit Fees and Related
Matters,” “Audit and Non-Audit Fees,” and “Audit Committee
Policy for Pre-Approval of Independent Auditor Services” in
the registrant’s definitive Proxy Statement for its 2018 Annual
Meeting of Shareholders to be held on April 24, 2018 and to be
filed with the SEC is incorporated by reference into this Item 14.
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Item 12.
The information at the captions “Nominees for Directorship,”
“Executive Officers,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Corporate Governance and Director
Independence,”
and
Nominations for Election to the Board,” and “Board Committees
and Attendance” in the registrant’s definitive Proxy Statement
for its 2018 Annual Meeting of Shareholders to be held on
April 24, 2018 and to be filed with the SEC is incorporated by
reference into this Item 10.
Recommendations
“Shareholder
Item 11.
EXECUTIVE COMPENSATION
Risk
Management,”
The information at the captions “Compensation Policies that
Affect
“Executive
Compensation” (“Compensation Discussion and Analysis,”
“Compensation Committee Report,”
“2017 Summary
Compensation Table,” “2017 Grants of Plan-Based Awards,”
“Outstanding Equity Awards at December 31, 2017,” “2017
Pension Benefits Table,” “2017 Nonqualified Deferred
Compensation Table,” “2017 Potential Payments Upon
Termination or Change in Control,” and “Option Exercises and
Stock Vested in 2017”), “2017 Director Compensation,” and
“Compensation Committee Interlocks and Insider Participation”
in the registrant’s definitive Proxy Statement for its 2018 Annual
Meeting of Shareholders to be held on April 24, 2018 and to be
filed with the SEC is incorporated by reference into this Item 11.
164
PART IV
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements of SunTrust Banks, Inc. included in this report:
Consolidated Statements of Income for the years ended December 31, 2017, 2016, and 2015;
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015;
Consolidated Balance Sheets at December 31, 2017 and 2016;
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016, and 2015; and
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015.
(a)(2) Financial Statement Schedules
All financial statement schedules for the Company have been included in the Consolidated Financial Statements or the
accompanying Notes, or are either inapplicable or not required.
(a)(3) Exhibits
The following documents are filed as part of this report:
Exhibit
Number
3.1
Description
Amended and Restated Articles of Incorporation, restated effective January 20, 2009, incorporated by reference
to Exhibit 4.1 to the registrant's Current Report on Form 8-K filed January 22, 2009, as further amended by (i)
Articles of Amendment dated December 13, 2012, incorporated by reference to Exhibit 3.1 to the registrant's Current
Report on Form 8-K filed December 20, 2012, (ii) the Articles of Amendment dated November 6, 2014, incorporated
by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K filed November 7, 2014, (iii) the Articles
of Amendment dated May 1, 2017, incorporated by reference to Exhibit 3.1 to the registrant's Current Report on
Form 8-K filed May 2, 2017, and (iv) the Articles of Amendment dated November 13, 2017, incorporated by
reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K filed November 14, 2017.
Location
*
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Bylaws of the Registrant, as amended and restated on August 11, 2015, incorporated by reference to Exhibit 3.2
to the registrant's Current Report on Form 8-K filed August 13, 2015.
Indenture between registrant and The First National Bank of Chicago, as Trustee, dated May 1, 1993, incorporated
by reference to Exhibit 4(b) to Registration Statement No. 33-62162.
Indenture between registrant and PNC, N.A., as Trustee, dated May 1, 1993, incorporated by reference to Exhibit
4(a) to Registration Statement No. 33-62162.
Indenture between National Commerce Financial Corporation and The Bank of New York, as Trustee, dated as of
March 27, 1997, incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of National
Commerce Bancorporation (File No. 333-29251).
Form of Indenture between registrant and The First National Bank of Chicago, as Trustee, to be used in connection
with the issuance of Subordinated Debt Securities, incorporated by reference to Exhibit 4.4 to Registration Statement
No. 333-25381 filed May 6, 1997.
First Supplemental Indenture between National Commerce Financial Corporation and the Bank of New York,
as Trustee, dated as of March 27, 1997, incorporated by reference to Exhibit 4.2 to the Registration Statement on
Form S-4 of National Commerce Bancorporation (File No. 333-29251).
Form of Indenture between registrant and The First National Bank of Chicago, as Trustee, to be used in connection
with the issuance of Subordinated Debt Securities, incorporated by reference to Exhibit 4.4 to Registration Statement
No. 333-46123 filed February 11, 1998.
Indenture, dated as of October 25, 2006, between SunTrust Banks, Inc. and U.S. Bank National Association, as
Trustee, incorporated by reference to Exhibit 4.3 to the registrant's Registration Statement on Form 8-A filed on
December 5, 2006.
Form of First Supplemental Indenture (to Indenture dated as of October 25, 2006) between SunTrust Banks, Inc.
and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.5 to the registrant's
Registration Statement on Form 8-A filed on October 24, 2006.
*
*
*
*
*
*
*
*
*
165
Exhibit
Number
4.9
Description
Form of Second Supplemental Indenture (to Indenture dated as of October 25, 2006) between SunTrust Banks,
Inc. and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.4 to the registrant's
Registration Statement on Form 8-A filed on December 5, 2006.
Location
*
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
10.1
Senior Indenture, dated as of September 10, 2007 by and between SunTrust Banks, Inc. and U.S. Bank National
Association, as Trustee, incorporated by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K
filed on September 10, 2007.
Form of Third Supplemental Indenture to the Junior Subordinated Notes Indenture between SunTrust Banks,
Inc. and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.4 to the registrant's
Registration Statement on Form 8-A filed on March 3, 2008.
Warrant Agreement for 6,008,902 Warrants, dated September 22, 2011, among SunTrust Banks, Inc.,
Computershare Inc. and Computershare Trust Company, N.A., incorporated by reference to Exhibit 4.1 to the
registrant's Form 8-A for the Series A Warrants filed September 23, 2011.
Warrant Agreement for 11,891,280 Warrants, dated September 22, 2011, among SunTrust Banks, Inc.,
Computershare Inc. and Computershare Trust Company, N.A., incorporated by reference to Exhibit 4.1 to the
registrant's Form 8-A for the Series B Warrants filed September 23, 2011.
Form of Series A Preferred Stock Certificate, incorporated by reference to Exhibit 4.2 to registrant's Current
Report on Form 8-K filed September 12, 2006.
Form of Stock Certificate Representing the 5.853% Fixed-to-Floating Rate Normal Preferred Purchase
Securities of SunTrust Preferred Capital I, incorporated by reference to Exhibit 4.3.2 to registrant's Post-Effective
Amendment No. 1 to Form S-3 filed on October 18, 2006.
Form of Series E Preferred Stock Certificate, incorporated by reference to Exhibit 4.2 to registrant's Current
Report on Form 8-K filed December 20, 2012.
Form of Series F Preferred Stock Certificate, incorporated by reference to Exhibit 4.2 to registrant's Current
Report on Form 8-K filed November 7, 2014.
Form of Series G Preferred Stock Certificate, incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed May 2, 2017.
Form of Series H Preferred Stock Certificate, incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed November 14, 2017.
SunTrust Banks, Inc. Annual Incentive Plan, amended and restated as of January 1, 2014, incorporated by
reference to Appendix B to the registrant’s Proxy Statement filed March 10, 2014.
*
*
*
*
*
*
*
*
*
*
*
166
Exhibit
Number
10.2
10.3
10.4
Description
SunTrust Banks, Inc. 2009 Stock Plan, as amended and restated as of August 11, 2015, incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K filed August 13, 2015, together with (i) Form of Nonqualified Stock
Option Agreement; (ii) Form of Performance-Vested Stock Option Agreement; (iii) Form of Pro-Rata Nonqualified
Stock Option Award Agreement; (iv) Form of Restricted Stock Agreement (3-year cliff vesting); (v) Form of
Restricted Stock Agreement (3-year ratable vesting); (vi) Form of Performance Stock Agreement; (vii) Form of
CCP Long Term Restricted Stock Award Agreement; (viii) Form of Performance Stock Unit Agreement; (ix) Form
of TSR Performance-Vested Restricted Stock Unit Award Agreement; (x) Form of Tier 1 Capital Performance-
Vested Restricted Stock Unit Award Agreement; (xi) Form of (2010) Salary Share Stock Unit Award Agreement;
(xii) Form of (2011) SunTrust Banks, Inc. Salary Share Stock Unit Agreement; (xiii) Form of Non-Employee
Director Restricted Stock Award Agreement; (xiv) Form of Non-Employee Director Restricted Stock Unit Award
Agreement; (xv) Form of Co-investment Restricted Stock Unit Award Agreement with clawback under the SunTrust
Banks, Inc. 2009 Stock Plan; (xvi) Form of Performance Vested (ROA) Restricted Stock Unit Award Agreement
with clawback under the SunTrust Banks, Inc. 2009 Stock Plan; (xvii) Form of Performance Vested (TSR) Restricted
Stock Unit Award Agreement with clawback under the SunTrust Banks, Inc. 2009 Stock Plan; (xviii) Form of
Nonqualified Stock Option Award Agreement with clawback under the SunTrust Banks, Inc. 2009 Stock Plan; (xix)
Form of Time Vested Restricted Stock Award Agreement with clawback under the SunTrust Banks, Inc. 2009 Stock
Plan; (xx) Form of 2012 Non-Qualified Stock Option Award Agreement (2-year cliff vested) under the SunTrust
Banks, Inc. 2009 Stock Plan; (xxi) Form of Restricted Stock Unit Award Agreement, 2013 RORWA; (xxii) Form
of Restricted Stock Unit Award Agreement, 2013 TSR; (xxiii) Form of Restricted Stock Unit Agreement, 2014
TSR/Return on Tangible Common Equity (corrected); (xxiv) Form of Time-Vested Restricted Stock Unit Agreement,
2014 Type I; (xxv) Form of Time-Vested Restricted Stock Unit Agreement, 2014 Type II; (xxvi) Form of Restricted
Stock Unit Agreement, 2014 Return on Tangible Common Equity (corrected); (xxvii) Form of Restricted Stock
Unit Agreement, 2015 Return on Tangible Common Equity; (xxviii) Form of Restricted Stock Unit Agreement,
2015 Type I, three-year cliff; (xxix) Form of Restricted Stock Unit Agreement, 2016 Return on Tangible Common
Equity; (xxx) Form of Restricted Stock Unit Agreement, 2016 Retention I; (xxxi) Form of Restricted Stock Unit
Agreement, 2016 Retention II; (xxxii) Form of Restricted Stock Unit Award Agreement, 2016 ROTCE/TSR; and
(xxxiii) Form of Performance Vested Restricted Stock Unit Award Agreement, 2017, (ROTCE/TSR), Form of Time
Vested Restricted Stock Unit Award Agreement, 2017, Type I (VIR), and Form of Time Vested Restricted Stock
Unit Award Agreement, 2017, Type II, incorporated by reference to:
(i) Exhibit 10.1.1 to the Company's Registration Statement No. 333-158866 on Form S-8 filed April 28, 2009; (ii)
Exhibit 10.1.2 to the Company's Registration Statement No. 333-158866 on Form S-8 filed April 28, 2009; (iii)
Exhibit 10.3 of the Company's Current Report on Form 8-K filed April 4, 2011; (iv) Exhibit 10.1.4 to the Company's
Registration Statement No. 333-158866 on Form S-8 filed April 28, 2009; (v) Exhibit 10.1.3 to the Company's
Registration Statement No. 333-158866 on Form S-8 filed April 28, 2009; (vi) Exhibit 10.1.6 to the Company's
Registration Statement No. 333-158866 on Form S-8 filed April 28, 2009; (vii) Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q filed November 5, 2010; (viii) Exhibit 10.1.7 to the Company's Registration
Statement No. 333-158866 on Form S-8 filed April 28, 2009; (ix) Exhibit 10.1 of the Company's Current Report
on Form 8-K/A filed April 27, 2011; (x) Exhibit 10.2 of the Company's Current Report on Form 8-K filed April 4,
2011; (xi) Exhibit 10.2 of the Company's Current Report on Form 8-K/A filed January 13, 2010; (xii) Exhibit 10.5
of the Company's Current Report on Form 8-K filed January 6, 2011; (xiii) Exhibit 10.1 of the Company's Current
Report on Form 8-K filed April 27, 2011; (xiv) Exhibit 10.2 of the Company's Current Report on Form 8-K filed
April 27, 2011; (xv) to (xix) Exhibits 10.26, Exhibits 10.27, Exhibits 10.28, Exhibits 10.29, and Exhibit 10.30 of
the Company's Annual Report on Form 10-K filed February 24, 2012; (xx) Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q filed August 1, 2012; (xxi) Exhibit 10.23 of the Company's Annual Report on Form 10-K
filed February 27, 2013; (xxii) Exhibit 10.24 of the Company's Annual Report on Form 10-K filed February 27,
2013; (xxiii) Exhibit 10.17 of the Company's Annual Report on Form 10-K filed February 24, 2014; (xxiv) Exhibit
10.18 of the Company's Annual Report on Form 10-K filed February 24, 2014; (xxv) Exhibit 10.19 of the Company's
Annual Report on Form 10-K filed February 24, 2014; (xxvi) Exhibit 10.17 of the Company's Annual Report on
Form 10-K filed February 24, 2015; (xxvii) Exhibit 10.18 of the Company's Annual Report on Form 10-K filed
February 24, 2015; (xxviii) Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed August 5, 2015;
(xxix) Exhibit 10.7 of the Company's Annual Report on Form 10-K filed February 23, 2016; (xxx) Exhibit 10.1 of
the Company's Current Report on Form 8-K filed February 12, 2016; (xxxi) Exhibit 10.2 of the Company's Current
Report on Form 8-K filed February 12, 2016; (xxxii) Exhibit 10.3 of the Company's Quarterly Report on Form 10-
Q filed May 4, 2016; and (xxxiii) Exhibit 10.19, Exhibit 10.20, and Exhibit 10.21 of the Company's Annual Report
on Form 10-K filed February 24, 2017.
SunTrust Banks, Inc. 2004 Stock Plan, effective April 20, 2004, as amended and restated February 12, 2008,
incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed February 15, 2008,
as further amended effective January 1, 2009, incorporated by reference to Exhibit 10.14 to the registrant's Current
Report on Form 8-K filed January 7, 2009, together with (i) Form of Non-Qualified Stock Option Agreement, (ii)
Form of Restricted Stock Agreement, (iii) Form of Director Restricted Stock Agreement, and (iv) Form of Director
Restricted Stock Unit Agreement, incorporated by reference to (i) Exhibit 10.70 of the registrant's Quarterly Report
on Form 10-Q filed May 8, 2006, (ii) Exhibit 10.71 of the registrant's Quarterly Report on Form 10-Q filed May
8, 2006, (iii) Exhibit 10.72 of the registrant's Quarterly Report on Form 10-Q filed May 8, 2006, and (iv) Exhibit
10.74 of the registrant's Quarterly Report on Form 10-Q filed May 8, 2006.
SunTrust Banks, Inc. 2000 Stock Plan, effective February 8, 2000, and amendments effective January 1, 2005,
November 14, 2006, and January 1, 2009, incorporated by reference to Exhibit A to registrant's 2000 Proxy Statement
on Form 14A (File No. 001-08918), to Exhibits 10.1 and 10.2 to the registrant's Current Report on Form 8-K filed
February 16, 2007, and to Exhibit 10.12 to the registrant's Current Report on Form 8-K filed January 7, 2009.
Location
*
*
*
167
Exhibit
Number
10.5
Description
GB&T Bancshares, Inc. Stock Option Plan of 1997, incorporated by reference to Exhibit 10.6 to the annual report
on Form 10-K of GB&T Bancshares Inc. filed March 31, 2003 (File No. 005-82430).
Location
*
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
GB&T Bancshares, Inc. 2007 Omnibus Long-Term Incentive Plan, incorporated by reference to Appendix A
to the definitive proxy statement of GB&T Bancshares Inc. filed April 18, 2007 (File No. 005-82430).
SunTrust Banks, Inc. Supplemental Executive Retirement Plan, amended and restated as of January 1, 2011,
incorporated by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q filed August 9, 2011,
as further amended by Amendment Number One, effective as of January 1, 2012, incorporated by reference to
Exhibit 10.10 to the registrant's Annual Report on Form 10-K filed February 24, 2012.
SunTrust Banks, Inc. ERISA Excess Retirement Plan, amended and restated effective as of January 1, 2011,
incorporated by reference to Exhibit 10.8 to the registrant's Quarterly Report on Form 10-Q filed August 9, 2011,
as further amended by Amendment Number One, effective as of January 1, 2012, incorporated by reference to
Exhibit 10.1 to the registrant's Annual Report on Form 10-K filed February 24, 2012.
SunTrust Restoration Plan, amended and restated effective May 31, 2011, incorporated by reference to Exhibit
10.9 to the registrant's Quarterly Report on Form 10-Q filed August 9, 2011, as further amended by Amendment
Number One, effective as of January 1, 2012, incorporated by reference to Exhibit 10.11 to the registrant's Annual
Report on Form 10-K filed February 24, 2012.
Forms of Change in Control Agreements between registrant and (i) William H. Rogers, Jr., (ii) Aleem Gillani,
(iii) Thomas E. Freeman, (iv) Mark A. Chancy, and (v) Anil Cheriyan, incorporated by reference to: (i) - (iii), Exhibit
10.13 to the registrant's Annual Report on Form 10-K filed February 23, 2010; (iv), Exhibit 10.12 to the registrant's
Annual Report on Form 10-K filed February 23, 2010; and (v) Exhibit 10.16 to the registrant's Annual Report on
Form 10-K filed February 24, 2012.
Executive Severance Plan, amended and restated July 24, 2014, incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q filed August 6, 2014.
SunTrust Banks, Inc. Deferred Compensation Plan, amended and restated effective as of January 1, 2015,
incorporated by reference to Exhibit 10.10 to the registrant's Annual Report on Form 10-K filed February 24, 2015.
SunTrust Banks, Inc. 401(k) Plan, amended and restated effective as of January 1, 2016, incorporated by reference
to Exhibit 10.13 to the registrant's Annual Report on Form 10-K filed February 24, 2017.
SunTrust Banks, Inc. 401(k) Plan Trust Agreement, amended and restated as of July 1, 2011, incorporated by
reference to Exhibit 10.23 to the registrant's Annual Report on Form 10-K filed February 24, 2012.
Consent Judgment between SunTrust Mortgage, Inc. (“SunTrust Mortgage”) on the one hand and the United States
Department of Justice, the United States Department of Housing and Urban Development, certain other federal
agencies, and the Attorneys General for forty-nine states and the District of Columbia dated as of June 17, 2014,
incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed August 6, 2014.
Restitution and Remediation Agreement, dated as of July 3, 2014 between SunTrust Mortgage, Inc. and the
United States of America, incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-
K filed July 3, 2014.
Master Agency Agreement, dated as of September 13, 2010 among SunTrust and SunTrust Robinson Humphrey,
Inc. (incorporated by reference to Exhibit 1.1 to the registrant's Form 8-K filed on September 14, 2010), as amended
by Amendment No. 1 to Master Agency Agreement, dated October 3, 2012, incorporated by reference to Exhibit
10.1 to the registrant's Current Report on Form 8-K filed October 3, 2012.
10.18
Form of Performance Vested Restricted Stock Unit Award Agreement, 2018, Type I.
10.19
Form of Performance Vested Restricted Stock Unit Award Agreement, 2018, Type II.
10.20
Form of Time Vested Restricted Stock Unit Award Agreement, 2018, Type I.
*
*
*
*
*
*
*
*
*
*
*
*
**
**
**
168
Exhibit
Number
10.21
Form of Time Vested Restricted Stock Unit Award Agreement, 2018, Type II.
Description
Location
**
10.22
Form of Time Vested Restricted Stock Unit Award Agreement, 2018, Type III.
10.23
Form of Time Vested Restricted Stock Unit Award Agreement, 2018, Type IV.
12.1
21.1
23.1
31.1
31.2
32.1
32.2
99.1
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
Registrant's Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Corporate Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Corporate Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Recoupment Policy, incorporated by reference to Exhibit 99.1 to the registrant's Annual Report on Form 10-K
filed February 23, 2016.
101.1
Interactive Data File.
**
**
**
**
**
**
**
**
**
*
**
Certain instruments defining rights of holders of long-term debt of the registrant and its subsidiaries are not filed herewith pursuant
to Item 601(b)(4)(iii) of Regulation S-K. At the Commission’s request, the registrant agrees to give the Commission a copy of any
instrument with respect to long-term debt of the registrant and its consolidated subsidiaries and any of its unconsolidated subsidiaries
for which financial statements are required to be filed under which the total amount of debt securities authorized does not exceed
ten percent of the total assets of the registrant and its subsidiaries on a consolidated basis.
*
**
incorporated by reference
filed herewith
169
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of February 2018.
SIGNATURES
SUNTRUST BANKS, INC.
(Registrant)
By: /s/ William H. Rogers, Jr.
William H. Rogers, Jr.,
Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints
Ellen M. Fitzsimmons and Aleem Gillani and each of them acting individually, as his or her attorneys-in-fact, each with full power
of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Annual
Report on Form 10-K.
170
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Date
Title
Principal Executive Officer:
/s/ William H. Rogers, Jr.
William H. Rogers, Jr.
Principal Financial Officer:
/s/ Aleem Gillani
Aleem Gillani
Principal Accounting Officer:
/s/ R. Ryan Richards
R. Ryan Richards
Directors:
/s/ Dallas S. Clement
Dallas S. Clement
/s/ Paul R. Garcia
Paul R. Garcia
/s/ M. Douglas Ivester
M. Douglas Ivester
/s/ Kyle Prechtl Legg
Kyle Prechtl Legg
/s/ Donna S. Morea
Donna S. Morea
/s/ David M. Ratcliffe
David M. Ratcliffe
/s/ Agnes Bundy Scanlan
Agnes Bundy Scanlan
/s/ Frank P. Scruggs, Jr.
Frank P. Scruggs, Jr.
/s/ Bruce L. Tanner
Bruce L. Tanner
/s/ Steven C. Voorhees
Steven C. Voorhees
/s/ Thomas R. Watjen
Thomas R. Watjen
_________________
Dr. Phail Wynn, Jr.
February 13, 2018
Chairman of the Board and
Chief Executive Officer
February 14, 2018
Corporate Executive Vice President and
Chief Financial Officer
February 14, 2018
Senior Vice President, Controller
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
February 13, 2018
Director
_______________
Director
171
SunTrust Banks, Inc.
303 Peachtree Street NE
Atlanta, GA 30308
©2018 SunTrust Banks, Inc. SUNTRUST, LIGHTING THE WAY TO FINANCIAL WELL-BEING, CONFIDENCE STARTS HERE, THE
ONUP CHALLENGE, ONUP, the SunTrust logo and the onUp logo are trademarks of SunTrust Banks, Inc. All rights reserved.
MOM-429705-10846129-18