STI-3.31.12-10Q
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-08918
SUNTRUST BANKS, INC.
(Exact name of registrant as specified in its charter)
Georgia
 
58-1575035
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
303 Peachtree Street, N.E., Atlanta, Georgia 30308
(Address of principal executive offices) (Zip Code)
(404) 588-7711
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
 ý  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
                    Large accelerated filer  x
 
                    Accelerated filer  o
 
                    Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
At April 30, 2012, 538,168,627 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding.




TABLE OF CONTENTS

 
 
Page
Glossary of Defined Terms
i - iii
 
 
 iii
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




GLOSSARY OF DEFINED TERMS
ABS — Asset-backed securities.
AFS — Available for sale.
AIP — Annual incentive plan.
ALCO — Asset/Liability Management Committee.
ALM — Asset/Liability Management.
ALLL — Allowance for loan and lease losses.
AOCI — Accumulated other comprehensive income.
ARS — Auction rate securities.
ASU — Accounting standards update.
ATE — Additional termination event.
ATM — Automated teller machine.
Bank — SunTrust Bank.
BCBS — Basel Committee on Banking Supervision.
Board — The Company’s Board of Directors.
CCAR — Comprehensive Capital Analysis and Review.
CDO — Collateralized debt obligation.
CD — Certificate of deposit.
CDS — Credit default swaps.
CIB — Corporate and Investment Banking.
Class A shares — Visa Inc. Class A common stock.
Class B shares —Visa Inc. Class B common stock.
CLO — Collateralized loan obligation.
Coke — The Coca-Cola Company.
Company — SunTrust Banks, Inc.
CP — Commercial paper.
CPP — Capital Purchase Program.
CSA — Credit support annex.
DBRS — Dun and Bradstreet, Inc.
DDA — Demand deposit account.
Dodd-Frank Act — The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
EPS — Earnings per share.
ERISA — Employee Retirement Income Security Act of 1974.
Exchange Act - Securities Exchange Act of 1934.
FASB — Financial Accounting Standards Board.
FDIC — The Federal Deposit Insurance Corporation.
Federal Reserve — The Board of Governors of the Federal Reserve System.
Fed funds — Federal funds.
FFELP — Federal Family Education Loan Program.
FHA — Federal Housing Administration.
FHLB — Federal Home Loan Bank.

i


FICO — Fair Isaac Corporation.
FINRA — Financial Industry Regulatory Authority.
Fitch — Fitch Ratings Ltd.
FRB — Federal Reserve Board.
FTE — Fully taxable-equivalent.
FVO — Fair value option.
GSE — Government-sponsored enterprise.
HARP — Home Affordable Refinance Program.
HUD — U.S. Department of Housing and Urban Development.
IFRS — International Financial Reporting Standards.
IIS — Institutional Investment Solutions.
IPO — Initial public offering.
IRLC — Interest rate lock commitment.
IRS — Internal Revenue Service.
ISDA — International Swaps and Derivatives Associations.
LGD — Loss given default.
LHFI — Loans held for investment.
LHFI-FV — Loans held for investment carried at fair value.
LHFS — Loans held for sale.
LIBOR —London InterBank Offered Rate.
LOCOM – Lower of cost or market.
LTI — Long-term incentive.
LTV— Loan to value.
MBS — Mortgage-backed securities.
MD&A — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Moody’s — Moody’s Investors Service.
MSR — Mortgage servicing right.
MVE — Market value of equity.
NEO — Named executive officers.
NOW — Negotiable order of withdrawal account.
NPL — Nonperforming loan.
OCI — Other comprehensive income.
OREO — Other real estate owned.
OTC — Over-the-counter.
OTTI — Other-than-temporary impairment.
Parent Company — Parent Company of SunTrust Banks, Inc. and subsidiaries.
PD — Probability of default.
PPG — Playbook for profitable growth.
QSPE — Qualifying special-purpose entity.
RidgeWorth — RidgeWorth Capital Management, Inc.
ROA — Return on average total assets.
ROE — Return on average common shareholders’ equity.

ii


RSU — Restricted Stock Unit.
RWA — Risk-weighted assets.
S&P — Standard and Poor’s.
SBA — Small Business Administration.
SEC — U.S. Securities and Exchange Commission.
SERP — Supplemental Executive Retirement Plan.
SPE — Special purpose entity.
STIS — SunTrust Investment Services, Inc.
STM — SunTrust Mortgage, Inc.
STRH — SunTrust Robinson Humphrey, Inc.
SunTrust — SunTrust Banks, Inc.
TARP — Troubled Asset Relief Program.
TDR — Troubled debt restructuring.
The Agreements — Equity forward agreements.
Three Pillars —Three Pillars Funding, LLC.
TRS — Total return swaps.
U.S. — United States.
U.S. GAAP — Generally Accepted Accounting Principles in the United States.
U.S. Treasury — The United States Department of the Treasury.
UTB — Unrecognized tax benefits.
VA —Veterans Administration.
VAR —Value at risk.
VI — Variable interest.
VIE — Variable interest entity.
Visa —The Visa, U.S.A. Inc. card association or its affiliates, collectively.
W&IM — Wealth and Investment Management.




PART I – FINANCIAL INFORMATION

The following unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary to comply with Regulation S-X have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.




iii


Item 1.
FINANCIAL STATEMENTS (UNAUDITED)

SunTrust Banks, Inc.
Consolidated Statements of Income


 
For the Three Months Ended March 31
(Dollars in millions and shares in thousands, except per share data) (Unaudited)
2012
 
2011
Interest Income
 
 
 
Interest and fees on loans

$1,300

 

$1,314

Interest and fees on loans held for sale
25

 
28

Interest and dividends on securities available for sale:
 
 
 
Taxable interest
168

 
165

Tax-exempt interest
4

 
5

    Dividends1
22

 
20

Trading account interest and other
15

 
22

Total interest income
1,534

 
1,554

Interest Expense
 
 
 
Interest on deposits
127

 
169

Interest on long-term debt
88

 
124

Interest on other borrowings
8

 
12

Total interest expense
223

 
305

Net interest income
1,311

 
1,249

Provision for credit losses
317

 
447

Net interest income after provision for credit losses
994

 
802

Noninterest Income
 
 
 
Service charges on deposit accounts
164


163

Trust and investment management income
130


135

Other charges and fees
115


126

Mortgage production related income/(loss)
63


(1
)
Mortgage servicing related income
81


72

Investment banking income
71


67

Card fees
61


100

Retail investment services
59


58

Trading income
57


52

Net securities gains2
18


64

Other noninterest income
57


47

Total noninterest income
876

 
883

Noninterest Expense
 
 
 
Employee compensation
652

 
618

Employee benefits
145

 
136

Outside processing and software
176

 
158

Net occupancy expense
88

 
89

Operating losses
60

 
27

Credit and collection services
56

 
51

Regulatory assessments
52

 
71

Other real estate expense
50

 
69

Equipment expense
45

 
44

Marketing and customer development
27

 
38

Amortization of intangible assets
11

 
11

Other noninterest expense
179

 
153

Total noninterest expense
1,541

 
1,465

Income before provision for income taxes
329

 
220

Provision for income taxes
69

 
33

Net income including income attributable to noncontrolling interest
260

 
187

Net income attributable to noncontrolling interest
10

 
7

Net income

$250

 

$180

Net income available to common shareholders

$245

 

$38

Net income per average common share
 
 
 
Diluted

$0.46

 

$0.08

Basic
0.46

 
0.08

Dividends declared per common share

$0.05

 

$0.01

Average common shares - diluted
536,407

 
503,503

Average common shares - basic
533,100

 
499,669

1 Includes dividends on common stock of The Coca-Cola Company of $15 million and $14 million during the three months ended March 31, 2012 and 2011, respectively.
2 Includes credit-related other-than-temporary impairment losses of $2 million and $1 million for the three months ended March 31, 2012 and 2011, respectively. There were no non-credit related unrealized other-than-temporary impairment losses recorded in other comprehensive income, before taxes, for the three months ended March 31, 2012 and 2011.
See Notes to Consolidated Financial Statements (unaudited).

1





SunTrust Banks, Inc.
Consolidated Statements of Comprehensive Income/(Loss)

 
For the Three Months Ended March 31
 
(Dollars in millions) (Unaudited)
2012
 
2011
 
Net Income

$250

 

$180

 
Components of Other Comprehensive Income/(Loss):
 
 
 
 
Change in unrealized gains on securities, net of tax of ($27) and $40, respectively
50

 
(69
)
 
Change in unrealized gains on derivatives, net of tax of $58 and $72, respectively
(101
)
 
(125
)
 
Change related to employee benefit plans, net of tax of $14 and ($2), respectively
(24
)
 
3

 
Total Other Comprehensive Loss
(75
)
 
(191
)
 
 
 
 
 
 
Total Comprehensive Income/(Loss)

$175

 

($11
)
 
See Notes to Consolidated Financial Statements (unaudited).


2


SunTrust Banks, Inc.
Consolidated Balance Sheets
  
As of
(Dollars in millions and shares in thousands) (Unaudited)
March 31
2012
 
December 31
2011
Assets
 
 
 
Cash and due from banks

$5,019

 

$3,696

Securities purchased under agreements to resell
941

 
792

Interest-bearing deposits in other banks
21

 
21

Cash and cash equivalents
5,981

 
4,509

Trading assets (including encumbered securities of $520 and $574 as of March 31, 2012 and December 31, 2011, respectively)
6,316

 
6,279

Securities available for sale
27,323

 
28,117

Loans held for sale1 (loans at fair value: $2,207 and $2,141 as of March 31, 2012 and December 31, 2011, respectively)
2,749

 
2,353

Loans2 (loans at fair value: $413 and $433 as of March 31, 2012 and December 31, 2011, respectively)
122,691

 
122,495

Allowance for loan and lease losses
(2,348
)
 
(2,457
)
Net loans
120,343

 
120,038

Premises and equipment
1,561

 
1,564

Goodwill
6,344

 
6,344

Other intangible assets (MSRs at fair value: $1,070 and $921 as of March 31, 2012 and December 31, 2011, respectively)
1,155

 
1,017

Other real estate owned
411

 
479

Other assets
6,043

 
6,159

Total assets

$178,226

 

$176,859

Liabilities and Shareholders’ Equity
 
 
 
Noninterest-bearing consumer and commercial deposits

$36,771

 

$34,359

Interest-bearing consumer and commercial deposits
90,947

 
91,252

Total consumer and commercial deposits
127,718

 
125,611

Brokered time deposits (CDs at fair value: $1,005 and $1,018 as of March 31, 2012 and December 31, 2011, respectively)
2,284

 
2,281

Foreign deposits
30

 
30

Total deposits
130,032

 
127,922

Funds purchased
908

 
839

Securities sold under agreements to repurchase
1,781

 
1,644

Other short-term borrowings
6,878

 
8,983

Long-term debt 3 (debt at fair value: $2,000 and $1,997 as of March 31, 2012 and December 31, 2011, respectively)
11,894

 
10,908

Trading liabilities
1,554

 
1,806

Other liabilities
4,938

 
4,691

Total liabilities
157,985

 
156,793

Preferred stock, no par value
275

 
275

Common stock, $1.00 par value
550

 
550

Additional paid in capital
9,243

 
9,306

Retained earnings
9,198

 
8,978

Treasury stock, at cost, and other4
(699
)
 
(792
)
Accumulated other comprehensive income, net of tax
1,674

 
1,749

Total shareholders’ equity
20,241

 
20,066

Total liabilities and shareholders’ equity

$178,226

 

$176,859

 
 
 
 
Common shares outstanding
538,056

 
536,967

Common shares authorized
750,000

 
750,000

Preferred shares outstanding
3

 
3

Preferred shares authorized
50,000

 
50,000

Treasury shares of common stock

11,865

 
12,954

1 Includes loans held for sale, at fair value, of consolidated VIEs

$326

 

$315

2 Includes loans of consolidated VIEs
1,378

 
3,322

3 Includes debt of consolidated VIEs ($289 at fair value as of both March 31, 2012 and December 31, 2011)
713

 
722

4 Includes $111 and $107 as of March 31, 2012 and December 31, 2011, respectively, related to noncontrolling interest held.
 
See Notes to Consolidated Financial Statements (unaudited).

3


SunTrust Banks, Inc.
Consolidated Statements of Shareholders’ Equity
(Dollars and shares in millions, except per share data) (Unaudited)
Preferred
Stock
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid in
Capital
 
Retained 
Earnings
 
Treasury
Stock and
Other 1
 
Accumulated
Other 
Comprehensive 
Income 2
 
Total
Balance, January 1, 2011

$4,942

 
500

 

$515

 

$8,403

 

$8,542

 

($888
)
 

$1,616

 

$23,130

Net income

 

 

 

 
180

 

 

 
180

Other comprehensive loss

 

 

 

 

 

 
(191
)
 
(191
)
Change in noncontrolling interest

 

 

 

 

 
2

 

 
2

Common stock dividends, $0.01 per share

 

 

 

 
(5
)
 

 

 
(5
)
Preferred stock dividends, $1,000 per share

 

 

 

 
(2
)
 

 

 
(2
)
U.S. Treasury preferred stock dividends, $1,236 per share

 

 

 

 
(60
)
 

 

 
(60
)
Accretion of discount for preferred stock issued to U.S. Treasury
6

 

 

 

 
(6
)
 

 

 

Repurchase of preferred stock issued to U.S. Treasury
(4,776
)
 

 

 

 
(74
)
 

 

 
(4,850
)
Issuance of common stock

 
35

 
35

 
981

 

 

 

 
1,016

Stock compensation expense

 

 

 
3

 

 

 

 
3

Restricted stock activity

 
2

 

 
(58
)
 

 
43

 

 
(15
)
Amortization of restricted stock compensation

 

 

 

 

 
9

 

 
9

Issuance of stock for employee benefit plans and other

 

 

 
(5
)
 

 
11

 

 
6

Balance, March 31, 2011

$172

 
537

 

$550

 

$9,324

 

$8,575

 

($823
)
 

$1,425

 

$19,223

Balance, January 1, 2012

$275

 
537

 

$550

 

$9,306

 

$8,978

 

($792
)
 

$1,749

 

$20,066

Net income

 

 

 

 
250

 

 

 
250

Other comprehensive loss

 

 

 

 

 

 
(75
)
 
(75
)
Change in noncontrolling interest

 

 

 

 

 
4

 

 
4

Common stock dividends, $0.05 per share

 

 

 

 
(27
)
 

 

 
(27
)
Preferred stock dividends, $1,011 per share

 

 

 

 
(3
)
 

 

 
(3
)
Exercise of stock options and stock compensation expense

 

 

 
(6
)
 

 
10

 

 
4

Restricted stock activity

 
1

 

 
(50
)
 

 
58

 

 
8

Amortization of restricted stock compensation

 

 

 

 

 
7

 

 
7

Issuance of stock for employee benefit plans and other

 

 

 
(7
)
 

 
14

 

 
7

Balance, March 31, 2012

$275

 
538

 

$550

 

$9,243

 

$9,198

 

($699
)
 

$1,674

 

$20,241


1 At March 31, 2012 includes ($737) million for treasury stock, ($73) million for compensation element of restricted stock, and $111 million for noncontrolling interest.
At March 31, 2011 includes ($881) million for treasury stock, ($73) million for compensation element of restricted stock, and $131 million for noncontrolling interest.
2 Components of AOCI at March 31, 2012 included $1,913 million in unrealized net gains on AFS securities, $468 million in unrealized net gains on derivative financial instruments, and ($707) million related to employee benefit plans. At March 31, 2011 components included $1,457 million in unrealized net gains on AFS securities, $407 million in unrealized net gains on derivative financial instruments, and ($439) million related to employee benefit plans.
 
See Notes to Consolidated Financial Statements (unaudited).

4


SunTrust Banks, Inc.
Consolidated Statements of Cash Flows
 
 
Three Months Ended March 31
 
(Dollars in millions) (Unaudited)
2012
 
2011
 
Cash Flows from Operating Activities
 
 
 
 
Net income including income attributable to noncontrolling interest

$260

 

$187

 
Adjustments to reconcile net income to net cash provided by operating activities:

 
 
 
Depreciation, amortization, and accretion
192

 
186

 
Origination of mortgage servicing rights
(83
)
 
(88
)
 
Provisions for credit losses and foreclosed property
362

 
490

 
Mortgage repurchase provision
175

 
80

 
Stock option compensation and amortization of restricted stock compensation
8

 
12

 
Net securities gains
(18
)
 
(64
)
 
Net gain on sale of assets
(252
)
 
(17
)
 
Net decrease in loans held for sale
246

 
1,465

 
Net increase in other assets
(251
)
 
(125
)
 
Net decrease in other liabilities
(537
)
 
(221
)
 
Net cash provided by operating activities
102

 
1,905

 
Cash Flows from Investing Activities
 
 
 
 
Proceeds from maturities, calls, and paydowns of securities available for sale
1,506

 
1,158

 
Proceeds from sales of securities available for sale
670

 
9,413

 
Purchases of securities available for sale
(992
)
 
(10,100
)
 
Proceeds from maturities, calls, and paydowns of trading securities

 
77

 
Proceeds from sales of trading securities

 
102

 
Net increase in loans including purchases of loans
(1,296
)
 
(304
)
 
Proceeds from sales of loans
252

 
143

 
Capital expenditures
(48
)
 
(1
)
 
Proceeds from the sale of other assets
121

 
198

 
Net cash provided by investing activities
213

 
686

 
Cash Flows from Financing Activities
 
 
 
 
Net increase in total deposits
2,110

 
941

 
Net (decrease)/increase in funds purchased, securities sold under agreements
to repurchase, and other short-term borrowings
(1,899
)
 
301

 
Proceeds from the issuance of long-term debt
1,000

 
1,039

 
Repayment of long-term debt
(34
)
 
(132
)
 
Proceeds from the exercise of stock options
2

 

 
Excess tax benefits from stock-based compensation
8

 

 
Proceeds from the issuance of common stock

 
1,016

 
   Repurchase of preferred stock

 
(4,850
)
 
Common and preferred dividends paid
(30
)
 
(67
)
 
Net cash provided by/(used in) financing activities
1,157

 
(1,752
)
 
Net increase in cash and cash equivalents
1,472

 
839

 
Cash and cash equivalents at beginning of period
4,509

 
5,378

 
Cash and cash equivalents at end of period

$5,981

 

$6,217

 
Supplemental Disclosures:
 
 
 
 
Loans transferred from loans held for sale to loans

$11

 

$5

 
Loans transferred from loans to loans held for sale
429

 
122

 
Loans transferred from loans to other real estate owned
96

 
201

 
Accretion of discount for preferred stock issued to the U.S. Treasury

 
80

 

See Notes to Consolidated Financial Statements (unaudited).

5


Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could vary from these estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
The Company evaluated subsequent events through the date its financial statements were issued.
These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Except for accounting policies that have been recently adopted as described below, there have been no significant changes to the Company’s accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Accounting Policies Recently Adopted and Pending Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The primary purpose of the ASU is to conform the language in the fair value measurements guidance in U.S. GAAP and IFRS. The ASU also clarifies how to apply existing fair value measurement and disclosure requirements. Further, the ASU requires additional disclosures about transfers between level 1 and 2 of the fair value hierarchy, quantitative information for level 3 inputs, and the level of the fair value measurement hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. The ASU is effective for the interim reporting period ending March 31, 2012. The Company adopted the standard as of January 1, 2012, and the required disclosures are included in Note 12, “Fair Value Election and Measurement.” The adoption did not impact the Company’s financial position, results of operations, or EPS.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The ASU requires presentation of the components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The update does not change the items presented in OCI and does not affect the calculation or reporting of EPS. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05,” which deferred the effective date for the amendments to the reclassification of items out of AOCI. The guidance, with the exception of reclassification adjustments, was effective on January 1, 2012 and must be applied retrospectively for all periods presented. The Company adopted the standard as of January 1, 2012, and the required disclosures are included in the Consolidated Statements of Comprehensive Income/(Loss). The adoption did not impact the Company’s financial position, results of operations, or EPS.
In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” The ASU amends interim and annual goodwill impairment testing requirements such that an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The more likely than not threshold is defined as having a likelihood of more than 50 percent. The guidance is effective for annual and interim goodwill impairment tests beginning January 1, 2012. The Company adopted the standard as of January 1, 2012 and has applied the guidance to interim goodwill impairment testing. The adoption did not have an impact on the Company's financial position, results of operations, or EPS.

6

Notes to Consolidated Financial Statements (Unaudited), continued



NOTE 2 – SECURITIES AVAILABLE FOR SALE
Securities Portfolio Composition

 
March 31, 2012
(Dollars in millions)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities

$221

 

$10

 

$—

 

$231

Federal agency securities
1,671

 
77

 
1

 
1,747

U.S. states and political subdivisions
406

 
19

 
6

 
419

MBS - agency
20,251

 
718

 
2

 
20,967

MBS - private
237

 

 
21

 
216

CDO/CLO securities
43

 

 

 
43

ABS
394

 
13

 
6

 
401

Corporate and other debt securities
43

 
3

 

 
46

Coke common stock

 
2,220

 

 
2,220

Other equity securities1
1,032

 
1

 

 
1,033

Total securities AFS

$24,298

 

$3,061

 

$36

 

$27,323

 
 
 
 
 
 
 
 
 
December 31, 2011
(Dollars in millions)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities

$671

 

$23

 

$—

 

$694

Federal agency securities
1,843

 
89

 

 
1,932

U.S. states and political subdivisions
437

 
21

 
4

 
454

MBS - agency
20,480

 
743

 

 
21,223

MBS - private
252

 

 
31

 
221

CDO/CLO securities
50

 

 

 
50

ABS
460

 
11

 
7

 
464

Corporate and other debt securities
49

 
2

 

 
51

Coke common stock

 
2,099

 

 
2,099

Other equity securities1
928

 
1

 

 
929

Total securities AFS

$25,170

 

$2,989

 

$42

 

$28,117

1At March 31, 2012, other equity securities included the following securities at cost: $432 million in FHLB of Atlanta stock, $398 million in Federal Reserve Bank stock, and $202 million in mutual fund investments. At December 31, 2011, other equity securities included the following securities at cost: $342 million in FHLB of Atlanta stock, $398 million in Federal Reserve Bank stock, and $187 million in mutual fund investments.

Securities AFS that were pledged to secure public deposits, repurchase agreements, trusts, and other funds had a fair value of $8.0 billion and $9.1 billion as of March 31, 2012 and December 31, 2011, respectively. Further, under The Agreements, the Company pledged its shares of Coke common stock, which is hedged with derivative instruments, as discussed in Note 10, “Derivative Financial Instruments.” As of March 31, 2012 and December 31, 2011, there were no securities AFS pledged under which the transferee may repledge the collateral. The Company has also pledged $944 million and $770 million of certain marketable securities and cash equivalents to secure $923 million and $747 million of repurchase agreements as of March 31, 2012 and December 31, 2011, respectively.


7

Notes to Consolidated Financial Statements (Unaudited), continued

The amortized cost and fair value of investments in debt securities at March 31, 2012 by estimated average life are shown below. Actual cash flows may differ from estimated average lives and contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
 
 
Distribution of Maturities
(Dollars in millions)
1 Year
or Less      
 
1-5
Years      
 
5-10
Years      
 
After 10      
Years
 
Total        
Amortized Cost:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities

$8

 

$213

 

$—

 

$—

 

$221

Federal agency securities
99

 
1,391

 
91

 
90

 
1,671

U.S. states and political subdivisions
126

 
203

 
23

 
54

 
406

MBS - agency
797

 
15,376

 
1,750

 
2,328

 
20,251

MBS - private

 
185

 
52

 

 
237

CDO/CLO securities

 
43

 

 

 
43

ABS
172

 
155

 

 
67

 
394

Corporate and other debt securities
2

 
4

 
37

 

 
43

Total debt securities

$1,204

 

$17,570

 

$1,953

 

$2,539

 

$23,266

Fair Value:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities

$8

 

$223

 

$—

 

$—

 

$231

Federal agency securities
100

 
1,456

 
99

 
92

 
1,747

U.S. states and political subdivisions
129

 
217

 
23

 
50

 
419

MBS - agency
841

 
15,972

 
1,802

 
2,352

 
20,967

MBS - private

 
168

 
48

 

 
216

CDO/CLO securities

 
43

 

 

 
43

ABS
173

 
155

 

 
73

 
401

Corporate and other debt securities
2

 
4

 
40

 

 
46

Total debt securities

$1,253

 

$18,238

 

$2,012

 

$2,567

 

$24,070





Securities in an Unrealized Loss Position
The Company held certain investment securities having unrealized loss positions. Market changes in interest rates and credit spreads will result in temporary unrealized losses as the market price of securities fluctuates. As of March 31, 2012, the Company did not intend to sell these securities nor was it more-likely-than-not that the Company would be required to sell these securities before their anticipated recovery or maturity. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.


8

Notes to Consolidated Financial Statements (Unaudited), continued

 
March 31, 2012
 
Less than twelve months
 
Twelve months or longer
 
Total
(Dollars in millions)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized  
Losses
Temporarily impaired securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agency securities

$48

 

$1

 

$—

 

$—

 

$48

 

$1

U.S. states and political subdivisions
1

 

 
24

 
6

 
25

 
6

MBS - agency
472

 
2

 
1

 

 
473

 
2

ABS

 

 
11

 
4

 
11

 
4

Total temporarily impaired securities

521

 
3

 
36

 
10

 
557

 
13

Other-than-temporarily impaired securities:1
 
 
 
 
 
 
 
 
 
 
 
MBS - private
1

 

 
215

 
21

 
216

 
21

ABS
1

 

 
4

 
2

 
5

 
2

Total other-than-temporarily impaired securities
2

 

 
219

 
23

 
221

 
23

Total impaired securities

$523

 

$3

 

$255

 

$33

 

$778

 

$36

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Less than twelve months
 
Twelve months or longer
 
Total
(Dollars in millions)
Fair
   Value   
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Temporarily impaired securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agency securities

$10

 

$—

 

$—

 

$—

 

$10

 

$—

U.S. states and political subdivisions
1

 

 
28

 
4

 
29

 
4

MBS - agency
224

 

 
1

 

 
225

 

CDO/CLO securities
50








50



ABS

 

 
11

 
5

 
11

 
5

Total temporarily impaired securities
285

 

 
40

 
9

 
325

 
9


Other-than-temporarily impaired securities:1
 
 
 
 
 
 
 
 
 
 
 
MBS - private
15

 
1

 
206

 
30

 
221

 
31

ABS
1

 

 
3

 
2

 
4

 
2

Total other-than-temporarily impaired securities
16

 
1

 
209

 
32

 
225

 
33

Total impaired securities

$301

 

$1

 

$249

 

$41

 

$550

 

$42

1Includes OTTI securities for which credit losses have been recorded in earnings in current or prior periods.

At March 31, 2012 and December 31, 2011, unrealized losses on securities that have been in a temporarily impaired position for longer than twelve months include municipal ARS and one ABS collateralized by 2004 vintage home equity loans. The municipal securities are backed by investment grade rated obligors; however, the fair value of these securities continues to be impacted by the lack of a functioning ARS market and the extension of time for expected refinance and repayment. No credit loss is expected on these securities. The ABS is also highly-rated, continues to receive timely principal and interest payments, and is evaluated quarterly for credit impairment. Cash flow analysis shows that the underlying collateral can withstand highly stressed loss assumptions without incurring a credit loss.

The portion of unrealized losses on securities that have been other-than-temporarily impaired that relates to factors other than credit are recorded in AOCI. Losses related to credit impairment on these securities is determined through estimated cash flow analyses and have been recorded in earnings in current or prior periods. The unrealized OTTI loss relating to private MBS as of March 31, 2012 includes purchased and retained interests from 2007 vintage securitizations. The unrealized OTTI loss relating to ABS is related to four securities within the portfolio that are 2003 and 2004 vintage home equity issuances. The expectation of cash flows for the previously impaired ABS securities has improved since the time credit-related impairment was recognized, and as a result, the amount of expected credit losses was reduced, and the expected increase in cash flows will be accreted into earnings as a yield adjustment over the remaining life of the securities.


9

Notes to Consolidated Financial Statements (Unaudited), continued

Realized Gains and Losses and Other-than-Temporarily Impaired Securities
 
Three Months Ended March 31
(Dollars in millions)
2012
 
2011
Gross realized gains

$20

 

$143

Gross realized losses

 
(78
)
OTTI
(2
)
 
(1
)
Net securities gains

$18

 

$64


The securities that gave rise to the $2 million and $1 million credit impairments recognized during the three months ended March 31, 2012 and 2011, respectively, consisted of private MBS with a fair value of $114 million at both March 31, 2012 and 2011. Credit impairment that is determined through the use of cash flow models is estimated using cash flows on security specific collateral and the transaction structure. Future expected credit losses are determined by using various assumptions, the most significant of which include default rates, prepayment rates, and loss severities. For the majority of the securities that the Company has reviewed for credit-related OTTI, credit information is available and modeled for the collateral underlying each security. As part of that analysis, the model incorporates loan level information such as loan to collateral values, FICO scores, and home price appreciation/depreciation data specific to the geography of the loan. These inputs are updated on a regular basis to ensure the most current credit and other assumptions are utilized in the analysis. If, based on this analysis, the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are then discounted at the security’s initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities. During the three months ended March 31, 2012 and 2011, all OTTI recognized in earnings on private MBS have underlying collateral of residential mortgage loans securitized in 2007. The Company has not purchased new private MBS during the three months ended March 31, 2012, and continues to reduce existing exposure primarily through paydowns. 

 
Three Months Ended March 31
 
2012
 
2011
(Dollars in millions)
MBS - Private
 
MBS - Private
OTTI1

$2

 

$1

Portion of losses recognized in OCI (before taxes)

 

Net impairment losses recognized in earnings

$2

 

$1

1 The initial OTTI amount represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent impairments of the same security, amount represents additional declines in the fair value subsequent to the previously recorded OTTI, if applicable, until such time the security is no longer in an unrealized loss position.


10

Notes to Consolidated Financial Statements (Unaudited), continued


The following is a rollforward of credit losses recognized in earnings for the three months ended March 31, 2012 and 2011 related to securities for which some portion of the OTTI loss remains in AOCI: 
(Dollars in millions)
 
Balance, January 1, 2012

$25

Additions:
 
OTTI credit losses on previously impaired securities
2

Balance, March 31, 2012

$27

 
 
Balance, January 1, 2011

$20

Additions:
 
OTTI credit losses on previously impaired securities
1

Balance, March 31, 2011

$21

     

The following table presents a summary of the significant inputs used in determining the measurement of credit losses recognized in earnings for private MBS for the three months ended March 31, 2012 and 2011:
 
 
March 31, 2012
 
March 31, 2011
Default rate
2 - 6%
 
5 - 7%
Prepayment rate
8 - 16%
 
13 - 19%
Loss severity
47 - 52%
 
39 - 43%

Assumption ranges represent the lowest and highest lifetime average estimates of each security for which credit losses were recognized in earnings. During the first quarter of 2012, there was improvement in the default estimates for certain credit impaired bonds; however, the slower prepayment speeds and higher severity rates resulted in the recognition of additional impairment. 

11

Notes to Consolidated Financial Statements (Unaudited), continued



NOTE 3 - LOANS
Composition of Loan Portfolio
The composition of the Company's loan portfolio is shown in the following table:
(Dollars in millions)
March 31,
2012
 
December 31,
2011
Commercial loans:
 
 
 
 Commercial & industrial

$50,189

 

$49,538

Commercial real estate
4,910

 
5,094

Commercial construction
1,086

 
1,240

Total commercial loans
56,185

 
55,872

Residential loans:
 
 
 
Residential mortgages - guaranteed
6,447

 
6,672

 Residential mortgages - nonguaranteed1
23,653

 
23,243

Home equity products
15,472

 
15,765

Residential construction
924

 
980

Total residential loans
46,496

 
46,660

Consumer loans:
 
 
 
Guaranteed student loans
7,186

 
7,199

Other direct
2,152

 
2,059

Indirect
10,145

 
10,165

Credit cards
527

 
540

Total consumer loans
20,010

 
19,963

LHFI

$122,691

 

$122,495

LHFS

$2,749

 

$2,353

1Includes $411 million and $431 million of loans carried at fair value at March 31, 2012 and December 31, 2011, respectively.

During the three months ended March 31, 2012 and 2011, the Company transferred $429 million and $122 million in LHFI to LHFS, and $11 million and $5 million in LHFS to LHFI, respectively. Additionally, during the three months ended March 31, 2012 and 2011, the Company sold $239 million and $141 million in loans and leases that had been held for investment at December 31, 2011 and December 31, 2010 for gains of $13 million and $2 million, respectively. There were no other material purchases or sales of LHFI during the period.

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 PD and LGD 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/analysis, and qualitative assessments.
For the commercial portfolio, the Company believes that the most appropriate credit quality indicator is the individual loan’s risk assessment expressed according to regulatory agency classification, Pass or Criticized. The Company's risk rating system is granular, with multiple risk ratings in both the Pass and Criticized categories. Pass ratings reflect relatively low expectations of default. The granularity in Pass ratings assists in the establishment of pricing, loan structures, approval requirements, reserves, and ongoing credit management requirements. Criticized assets have a higher PD. 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 Accruing Criticized (which includes Special Mention and a portion of Adversely Classified) and Non-Performing (which includes a portion of Adversely Classified, Doubtful, and Loss). This distinction identifies those higher risk loans for which there is a basis to believe that the Company will collect all amounts due from those where full collection is less certain.

12

Notes to Consolidated Financial Statements (Unaudited), continued

Risk ratings are refreshed at least annually, or more frequently as appropriate, based upon considerations such as market conditions, loan characteristics, and portfolio trends. Additionally, management routinely reviews portfolio risk ratings, trends, and concentrations to support risk identification and mitigation activities.
For consumer and residential 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 FICO scoring method, is a relevant credit quality indicator. 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. To enhance the Company's ability to manage risk, the Company changed its FICO scoring model to a more updated version in the first quarter of 2012 for the Home Equity, Indirect, and Other Direct portfolios. This change was the primary reason for an increase in the percentage of balances with FICO scores equal to or greater than 700 and conversely contributed to the decrease in the percentage of balances with FICO scores lower than 620. However, there was no impact to the Company's financial position or results of operations as a result of updating the FICO scoring model.
For government guaranteed student 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. As of March 31, 2012 and December 31, 2011, 78% and 79%, respectively, of the guaranteed student loan portfolio was current with respect to payments; however, the loss exposure to the Company was mitigated by the government guarantee.

LHFI by credit quality indicator are shown in the tables below:
 
Commercial & industrial
 
Commercial real estate
 
Commercial construction
(Dollars in millions)
March 31, 2012
 
December 31,
2011
 
March 31, 2012
 
December 31,
2011
 
March 31, 2012
 
December 31,
2011
Credit rating:
 
 
 
 
 
 
 
 
 
 
 
Pass

$48,213

 

$47,683

 

$3,754

 

$3,845

 

$568

 

$581

Criticized accruing
1,639

 
1,507

 
876

 
961

 
320

 
369

Criticized nonaccruing
337

 
348

 
280

 
288

 
198

 
290

Total

$50,189

 

$49,538

 

$4,910

 

$5,094

 

$1,086

 

$1,240

 
Residential mortgages  -
   nonguaranteed 2
 
Home equity products
 
Residential construction
(Dollars in millions)
March 31, 2012
 
December 31,
2011
 
March 31, 2012
 
December 31,
2011
 
March 31, 2012
 
December 31,
2011
Current FICO score range:
 
 
 
 
 
 
 
 
 
 
700 and above

$16,533

 

$16,139

 

$11,630

 

$11,084

 

$616

 

$661

620 - 699
4,212

 
4,132

 
2,443

 
2,903

 
198

 
202

Below 6201
2,908

 
2,972

 
1,399

 
1,778

 
110

 
117

Total

$23,653

 

$23,243

 

$15,472

 

$15,765

 

$924

 

$980

 
Consumer  - other direct 3
 
Consumer - indirect
 
Consumer - credit cards
(Dollars in millions)
March 31, 2012
 
December 31,
2011
 
March 31, 2012
 
December 31,
2011
 
March 31, 2012
 
December 31,
2011
Current FICO score range:
 
 
 
 
 
 
 
 
 
 
700 and above

$1,383

 

$1,251

 

$7,634

 

$7,397

 

$337

 

$347

620 - 699
228

 
273

 
1,826

 
1,990

 
138

 
142

Below 6201
77

 
86

 
685

 
778

 
52

 
51

Total

$1,688

 

$1,610

 

$10,145

 

$10,165

 

$527

 

$540

1For 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.
2Excludes $6.4 billion and $6.7 billion at March 31, 2012 and December 31, 2011, respectively, of guaranteed residential loans. At both March 31, 2012 and December 31, 2011, the majority of these loans had FICO scores of 700 and above.
3Excludes $464 million and $449 million as of March 31, 2012 and December 31, 2011, respectively, of private-label student loans with third party insurance. At March 31, 2012 and December 31, 2011, the majority of these loans had FICO scores of 700 and above.

13

Notes to Consolidated Financial Statements (Unaudited), continued

The payment status for the LHFI portfolio is shown in the tables below:
 
As of March 31, 2012
(Dollars in millions)
Accruing
Current
 
Accruing
30-89 Days
Past Due
 
Accruing
90+ Days
Past Due
 
  Nonaccruing2   
 
Total
Commercial loans:
 
 
 
 
 
 
 
 
 
Commercial & industrial

$49,771

 

$69

 

$12

 

$337

 

$50,189

Commercial real estate
4,617

 
13

 

 
280

 
4,910

Commercial construction
885

 
3

 

 
198

 
1,086

Total commercial loans
55,273

 
85

 
12

 
815

 
56,185

Residential loans:
 
 
 
 
 
 
 
 
 
Residential mortgages - guaranteed
5,187

 
133

 
1,127

 

 
6,447

Residential mortgages - nonguaranteed1
22,025

 
303

 
34

 
1,291

 
23,653

Home equity products
14,984

 
170

 
1

 
317

 
15,472

Residential construction
697

 
22

 
1

 
204

 
924

Total residential loans
42,893

 
628

 
1,163

 
1,812

 
46,496

Consumer loans:
 
 
 
 
 
 
 
 
 
Guaranteed student loans
5,638

 
587

 
961

 

 
7,186

Other direct
2,125

 
16

 
5

 
6

 
2,152

Indirect
10,088

 
37

 
4

 
16

 
10,145

Credit cards
514

 
6

 
7

 

 
527

Total consumer loans
18,365

 
646

 
977

 
22

 
20,010

Total LHFI

$116,531

 

$1,359

 

$2,152

 

$2,649

 

$122,691

1Includes $411 million of loans carried at fair value.
2Total nonaccruing loans past due 90 days or more totaled $2.2 billion. Nonaccruing loans past due fewer than 90 days include modified nonaccrual loans reported as TDRs.
 


 
As of December 31, 2011
(Dollars in millions)
Accruing
Current
 
Accruing
30-89 Days
Past Due
 
Accruing
90+ Days
Past Due
 
  Nonaccruing2   
 
Total
Commercial loans:
 
 
 
 
 
 
 
 
 
Commercial & industrial

$49,098

 

$80

 

$12

 

$348

 

$49,538

Commercial real estate
4,797

 
9

 

 
288

 
5,094

Commercial construction
943

 
7

 

 
290

 
1,240

Total commercial loans
54,838

 
96

 
12

 
926

 
55,872

Residential loans:
 
 
 
 
 
 
 
 
 
Residential mortgages - guaranteed
5,394

 
176

 
1,102

 

 
6,672

Residential mortgages - nonguaranteed1
21,501

 
324

 
26

 
1,392

 
23,243

Home equity products
15,223

 
204

 

 
338

 
15,765

Residential construction
737

 
22

 
1

 
220

 
980

Total residential loans
42,855

 
726

 
1,129

 
1,950

 
46,660

Consumer loans:
 
 
 
 
 
 
 
 
 
Guaranteed student loans
5,690

 
640

 
869

 

 
7,199

Other direct
2,032

 
14

 
6

 
7

 
2,059

Indirect
10,074

 
66

 
5

 
20

 
10,165

Credit cards
526

 
7

 
7

 

 
540

Total consumer loans
18,322

 
727

 
887

 
27

 
19,963

Total LHFI

$116,015

 

$1,549

 

$2,028

 

$2,903

 

$122,495

1Includes $431 million of loans carried at fair value.
2Total nonaccruing loans past due 90 days or more totaled $2.3 billion. Nonaccruing loans past due fewer than 90 days include modified nonaccrual loans reported as TDRs.


14

Notes to Consolidated Financial Statements (Unaudited), 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 $4 million and certain consumer, residential, and commercial loans whose terms have been modified in a TDR are individually evaluated for impairment. Smaller-balance homogeneous loans that are collectively evaluated for impairment are not included in the following tables. Additionally, the tables below exclude guaranteed student loans and guaranteed residential mortgages for which there was nominal risk of principal loss.