UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
2014 FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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)
Securities registered pursuant to section 12(b) of the Act:
Title of each class | Name of exchange on which registered |
Common Stock | New York Stock Exchange |
Depositary Shares, Each Representing 1/4000th Interest in a Share of Perpetual Preferred Stock, Series A | New York Stock Exchange |
5.853% Fixed-to-Floating Rate Normal Preferred Purchase Securities of SunTrust Preferred Capital I | New York Stock Exchange |
Depositary Shares, Each Representing 1/4000th Interest in a Share of Perpetual Preferred Stock, Series E | New York Stock Exchange |
Warrants to Purchase Common Stock at $44.15 per share, expiring November 14, 2018 | New York Stock Exchange |
Warrants to Purchase Common Stock at $33.70 per share, expiring December 31, 2018 | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ 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 þ
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 þ 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). þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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, 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.
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ 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 þ
The aggregate market value of the voting and non-voting Common Stock held by non-affiliates at June 30, 2014 was approximately $21.4 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 18, 2015, 522,938,524 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to Instruction G of Form 10-K, information in the Registrant’s Definitive Proxy Statement for its 2015 Annual Shareholder’s Meeting, which it will file with the SEC no later than April 28, 2015 (the “Proxy Statement”), is incorporated by reference into Items 10-14 of this Report.
TABLE OF CONTENTS
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GLOSSARY OF DEFINED TERMS
ABS — Asset-backed securities.
ACH — Automated clearing house.
AFS — Available for sale.
Agreements — Equity derivative agreements.
AIP — Annual Incentive Plan.
ALCO — Asset/Liability Committee.
ALM — Asset/Liability Management.
ALLL — Allowance for loan and lease losses.
AOCI — Accumulated other comprehensive income.
ARS — Auction rate securities.
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.
CDO — Collateralized debt obligation.
CD — Certificate of deposit.
CDR — Conditional default rate.
CDS — Credit default swaps.
CET 1 — Common Equity Tier 1 Capital (under Basel III).
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.
Company — SunTrust Banks, Inc.
CORO — Corporate Operations Risk Officer.
CP — Commercial paper.
CPP — Capital Purchase Program.
CPR — Conditional prepayment rate.
CRA — Community Reinvestment Act of 1977.
CRC — Corporate Risk Committee.
CRE — Commercial real estate.
CRO — Chief Risk Officer.
CRM — Corporate Risk Management.
CSA — Credit support annex.
CVA — Credit valuation adjustment.
DDA — Demand deposit account.
DFAST — Dodd-Frank Act Stress Test.
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.
EPS — Earnings per share.
ERISA — Employee Retirement Income Security Act of 1974.
Exchange Act — Securities Exchange Act of 1934.
Fannie Mae — Federal National Mortgage Association.
Freddie Mac — Federal Home Loan Mortgage Corporation.
FASB — Financial Accounting Standards Board.
FDIA — Federal Deposit Insurance Act.
FDIC — Federal Deposit Insurance Corporation.
FDICIA — Federal Deposit Insurance Corporation Improvement Act of 1991.
Federal Reserve — Federal Reserve System.
Fed funds — Federal funds.
FFELP — Federal Family Education Loan Program.
FFIEC — Federal Financial Institutions Examination Council.
FHA — Federal Housing Administration.
FHFA — Federal Housing Finance Agency.
FHLB — Federal Home Loan Bank.
FICO — Fair Isaac Corporation.
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FINRA — Financial Industry Regulatory Authority.
Fitch — Fitch Ratings Ltd.
Form 8-K and other legacy mortgage-related items — Items disclosed in Form 8-Ks filed with the SEC on January 5, 2015, September 9, 2014, July 3, 2014, and/or October 10, 2013, and other legacy mortgage-related items.
FRB — Federal Reserve Board.
FTE — Fully taxable-equivalent.
FVO — Fair value option.
GenSpring — GenSpring Family Offices, LLC.
Ginnie Mae — Government National Mortgage Association.
GLB Act — Gramm-Leach-Bliley Act.
GSE — Government-sponsored enterprise.
HAMP — Home Affordable Modification Program.
HOEPA — Home Owner's Equity Protection Act.
HRA — Health Reimbursement Account.
HUD — U.S. Department of Housing and Urban Development.
IIS — Institutional Investment Solutions.
IPO — Initial public offering.
IRLC — Interest rate lock commitment.
IRS — Internal Revenue Service.
ISDA — International Swaps and Derivatives Association.
LCR — Liquidity coverage ratio.
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.
MasterCard — MasterCard International.
MBS — Mortgage-backed securities.
MD&A — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MI — Mortgage insurance.
Moody’s — Moody’s Investors Service.
MRA — Master Repurchase Agreement.
MRM — Market Risk Management.
MRMG — Model Risk Management Group.
MSA — Metropolitan Statistical Area.
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.
OCI — Other comprehensive income.
OFAC — Office of Foreign Assets Control.
OREO — Other real estate owned.
OTC — Over-the-counter.
OTTI — Other-than-temporary impairment.
Parent Company — SunTrust Banks, Inc., the parent Company of SunTrust Bank and other subsidiaries of SunTrust Banks, Inc.
Patriot Act — The USA Patriot Act of 2001.
PMC — Portfolio Management Committee.
PD — Probability of default.
PPA — Personal Pension Account.
PWM — Private Wealth Management.
QSPE — Qualifying special-purpose entity.
REIT — Real estate investment trust.
RidgeWorth — RidgeWorth Capital Management, Inc.
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.
SPE — Special purpose entity.
STIS — SunTrust Investment Services, Inc.
STM — SunTrust Mortgage, Inc.
STRH — SunTrust Robinson Humphrey, Inc.
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SunTrust — SunTrust Banks, Inc.
SunTrust Community Capital — SunTrust Community Capital, LLC.
TDR — Troubled debt restructuring.
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.
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.
VOE — Voting 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.
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PART I
Item 1. | BUSINESS |
General
The Company, a Georgia corporation, a BHC, and a financial holding company, is one of the nation's largest banking organizations whose businesses provide a broad range of financial services to consumer, business, corporate and institutional clients. SunTrust was incorporated in 1984 under the laws of the State of Georgia. The principal executive offices of the Company are located in SunTrust Plaza, Atlanta, Georgia 30308. Additional information relating to our businesses and our subsidiaries is included in the information set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 20, “Business Segment Reporting,” to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Primary Market Areas
Through its principal subsidiary, SunTrust Bank, the Company offers a full line of financial services for consumers and businesses including deposit, credit, mortgage banking, and trust and investment services. Additional subsidiaries provide asset and wealth management, securities brokerage, and capital market services. SunTrust operates primarily within Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia and enjoys strong market positions in these markets. In certain businesses, SunTrust also operates in select markets nationally. SunTrust provides clients with a selection of branch-based and technology-based banking channels, including the internet, mobile, ATMs, and telebanking. SunTrust's client base encompasses a broad range of individuals and families, businesses, institutions, and governmental agencies. SunTrust operated the following business segments during 2014, with the remainder in Corporate Other: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking.
Omni-channel Strategy
Over the last several years, the Company has significantly increased investments in technology and other capabilities to provide clients with increased functionality and self-service capabilities. This resulted in increased utilization of lower-cost self-service channels, which has enabled us to reduce our branch count by 3% in 2014 and 13% since 2011. Going forward, we will continue to optimize our delivery network and the pace will be dependent upon client needs and preferences. We have also made investments in technology to grow revenues. Among these were the acquisition in 2012 of an on-line lending portal that became the foundation for our LightStream TM super-prime lending offering.
Acquisition and Disposition Activity
As part of its operations, the Company evaluates, when deemed appropriate, the potential acquisition of financial institutions and other business types eligible for financial holding company ownership or control. Additionally, the Company regularly analyzes the values of and may submit bids for assets of such financial institutions and other businesses. The Company may
also consider the potential disposition of certain of its assets, branches, subsidiaries, or lines of businesses. During the second quarter of 2014, the Company completed the sale of its RidgeWorth asset management subsidiary and recognized a $105 million pre-tax gain. Additional information for this transaction is included in Note 2, “Acquisitions/Dispositions,” to the Consolidated Financial Statements in Item 8 of this Form 10-K, which is incorporated herein by reference.
Government Supervision and Regulation
As a BHC and a financial holding company, the Company is subject to the regulation and supervision of the Federal Reserve, and as a Georgia-chartered BHC, by the Georgia Department of Banking and Finance. The Company's banking subsidiary, SunTrust Bank, is a Georgia state-chartered bank with branches in Georgia, Florida, the District of Columbia, Maryland, Virginia, North Carolina, South Carolina, Tennessee, Alabama, West Virginia, Mississippi, and Arkansas. SunTrust Bank is a member of the Federal Reserve System and is regulated by the Federal Reserve, the FDIC, and the Georgia Department of Banking and Finance.
The Company's banking subsidiary is subject to various requirements and restrictions under federal and state law, including requirements to maintain cash reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of SunTrust Bank and its subsidiaries. In addition to the impact of regulation, banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.
The Company's non-banking subsidiaries are regulated and supervised by various other regulatory bodies. For example, STRH is a broker-dealer registered with the SEC and is a FINRA member. STIS is also a broker-dealer and investment adviser registered with the SEC and a member of FINRA. GenSpring is an investment adviser registered with the SEC and a member of the National Futures Association. Furthermore, under the Dodd-Frank Act, the Federal Reserve may regulate and supervise any subsidiary of the Company to determine (i) the nature of the operations and financial condition of the company, (ii) the financial, operational and other risks of the company, (iii) the systems for monitoring and controlling such risks, and (iv) compliance with Title I of the Dodd-Frank Act.
The BHC Act limits the activities in which bank holding companies and their subsidiaries may engage. As a BHC that has elected to become a financial holding company, the Company may engage in additional activities “closely related to banking," including expanded securities activities, insurance sales, underwriting activities, and other financial activities, and may also acquire securities firms and insurance companies, subject to certain conditions. The expanded activities in which the Company may engage are limited to those that are (i) financial in nature or incidental to such financial activity, and/or (ii)
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complimentary to a financial activity and which do not pose a risk to the safety and soundness of a depository institution or the financial system generally. To maintain its status as a financial holding company, the Company and its banking subsidiary must be “well capitalized,” and “well managed” and must maintain at least a “satisfactory” CRA rating, failing which the Federal Reserve may, among other things, limit the Company’s ability to conduct these broader financial activities or, if the deficiencies persist, require the Company to divest the banking subsidiary. If the Company has not maintained a satisfactory CRA rating, the Company will not be able to commence any new financial activities or acquire a company that engages in such activities, although the Company will still be allowed to engage in activities closely related to banking.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC deposit insurance fund in the event the depository institution becomes in danger of default or is in default. For example, pursuant to the Dodd-Frank Act and Federal Reserve policy, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions, which may include circumstances in which it might not otherwise do so.
The Company and its subsidiaries are subject to an extensive regulatory framework of complex and comprehensive federal and state laws and regulations addressing the provision of banking and other financial services and other aspects of the Company’s businesses and operations. Regulation and regulatory oversight have increased significantly over the past four years, primarily as a result of the passage of the Dodd-Frank Act in 2010. The Dodd-Frank Act imposes regulatory requirements and oversight over banks and other financial institutions in a number of ways, among which are (i) creating the CFPB to regulate consumer financial products and services; (ii) creating the Financial Stability Oversight Council to identify and impose additional regulatory oversight on large financial firms; (iii) granting orderly liquidation authority to the FDIC for the liquidation of financial corporations that pose a risk to the financial system of the U.S.; (iv) requiring financial institutions to draft a resolution plan that contemplates the dissolution of the enterprise and submit that resolution plan to both the Federal Reserve and the FDIC; (v) limiting debit card interchange fees; (vi) adopting certain changes to shareholder rights and responsibilities, including a shareholder “say on pay” vote on executive compensation; (vii) strengthening the SEC's powers to regulate securities markets; (viii) regulating OTC derivative markets; (ix) restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; (x) changing the base upon which the deposit insurance assessment is assessed from deposits to, substantially, average consolidated assets minus equity; and (xi) amending the Truth in Lending Act with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.
One of the more important changes instituted by the Dodd-Frank Act is the requirement for twice-annual stress tests of the Company and its bank. The performance of the Company under the stress tests and the CCAR determine the capital actions the Company will be permitted by its regulators to take, such as dividends and share repurchases. Due to the importance and intensity of the stress tests and the CCAR process, the Company has dedicated significant resources to comply with stress testing and capital planning requirements. These changes have profoundly impacted our policies and procedures and will likely continue to do so as regulators adopt regulations going forward in accordance with the timetable for enacting regulations set forth in the Dodd-Frank Act.
The Dodd-Frank Act imposed a new regulatory regime for the OTC derivatives market, aimed at increasing transparency and reducing systemic risk in the derivative markets, such as requirements for central clearing, exchange trading, capital, margin, reporting, and recordkeeping. Jurisdiction is broadly shared by the CFTC for swaps and the SEC for security-based swaps. In 2012 and 2013, the CFTC finalized most of its core regulations, triggering a phased-in compliance period commencing in late 2012 and continuing throughout 2013. The Bank provisionally registered as a swap dealer with the CFTC and became subject to new substantive requirements, including trade reporting and robust 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), and mandatory clearing of certain standardized swaps designated by the CFTC, such as most interest rate swaps. The SEC has proposed most of its core regulations for security-based swaps but most of its new requirements await final regulations, which are expected to be similar to the CFTC rules for swaps. The Company's derivatives business is expected to become subject to additional substantive requirements, including margin requirements in excess of current market practice, increased capital requirements and exchange trading requirements. These new rules collectively will impose implementation and ongoing compliance requirements for the Company and will introduce additional legal risk, as a result of newly applicable anti-fraud and anti-manipulation provisions and private rights of action.
Under the Dodd-Frank Act, the FDIC has the authority to liquidate certain financial holding companies that are determined to pose significant risks to the financial stability of the U.S. (“covered financial companies”). Under this scenario, the FDIC would exercise broad powers to take prompt corrective action to resolve problems with a covered financial company. The Dodd-Frank Act gives the Financial Stability Oversight Council substantial resolution authority, which may affect or alter the rights of creditors and investors in a resolution or distressed scenario. The FDIC may make risk-based assessments of all bank holding companies with total consolidated assets greater than $50 billion to recover losses incurred by the FDIC in exercising its authority to liquidate covered financial companies. Pursuant to the Dodd-Frank Act, bank holding companies with total consolidated assets of $50 billion or more are required to submit resolution plans to the Federal Reserve and FDIC providing for the company's strategy for rapid and orderly resolution in the event of its material financial distress or failure. In September 2011, these agencies issued a joint final resolution plan rule
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implementing this requirement. The FDIC issued a separate such rule applicable to insured depository institutions of $50 billion or more in total assets. The Company and the Bank submitted their second resolution plans to these agencies in December 2014. If a plan is not approved, the Company’s and the Bank’s growth, activities, and operations may be restricted.
Most recently, federal regulators have finalized rules for new capital requirements for financial institutions that include several changes to the way capital is calculated and how assets are risk-weighted, informed in part by the Basel Committee on Banking Supervision's Basel III revised international capital framework. The rules, summarized briefly below, will have an effect on the Company's level of capital, and may influence the types of business the Company may pursue and how the Company pursues business opportunities. Among other things, the final rules raise the required minimums for certain capital ratios, add a new common equity ratio, include capital buffers, and restrict what constitutes capital. The new capital and risk weighting requirements became effective for the Company on January 1, 2015. At December 31, 2014, the Company provides an estimate of what CET 1 would be in accordance with the new capital and RWA requirements based upon the Company's interpretation of the final rules. See the Company's estimate in the "Capital Resources" section of Item 7, MD&A, in this Form 10-K.
Capital Framework and Basel III
On July 9, 2013, the Federal Reserve, jointly with other federal regulators, published three final rules, generally consistent with the three proposed rules published August 30, 2012, substantially implementing the Basel III accord for the U.S. banking system (the “Final Rules”). The Final Rules are effective for the Company starting January 1, 2015, pursuant to a phase-in schedule. The Final Rules generally include, among others, the following requirements applicable to the Company:
• | A new minimum CET 1 ratio of 4.5%; a Tier 1 capital ratio, with a numerator consisting of the sum of CET 1 and “Additional Tier 1 capital” instruments meeting specified requirements, of 6.0%; and a total capital ratio, with a numerator consisting of the sum of CET 1, Additional Tier 1 capital and Tier 2 capital, of 8.0%. |
• | CET 1 is defined narrowly by requiring that most deductions or adjustments to regulatory capital measures be made to CET 1, and expanding the scope of the deductions or adjustments as compared to existing regulations. |
• | A 2.5% “capital conservation buffer” to be phased-in starting January 1, 2016, added to the CET 1, Tier 1, and Total Capital ratios, effectively resulting (upon full implementation on January 1, 2019) in minimum ratios of 7.0%, 8.5%, and 10.5% for CET 1, Tier 1, and Total Capital, respectively. |
• | A significant increase to capital charges for certain CRE loans determined to be “high volatility commercial real estate exposures” and a minimum LTV ratio in accordance with regulatory guidelines, which would apply, subject to certain exceptions, to an array of CRE loans. |
• | An increase in capital charges for off-balance sheet unfunded commitments with an original maturity less than a year, and certain other off-balance sheet unfunded commitments. |
• | Inclusion of unrealized gains and losses in AOCI on all securities AFS, defined benefit pension plans, and certain cash flow hedges in the calculation of CET 1, subject to a one-time election to retain the current treatment for these items. |
The capital conservation buffer is a buffer of common equity above the minimum levels and is designed to provide incentives for banking organizations to hold sufficient capital to reduce the risk that their capital levels would fall below their minimum requirements during a period of financial stress. If a banking organization does not preserve the buffer it will face constraints on capital distributions, share repurchases and other capital instrument redemptions, and discretionary bonus payments to executive officers. The Company's and Bank's current capital levels already exceed these capital requirements, including the capital conservation buffer. See additional discussion of Basel III in the "Capital Resources" section of Item 7, MD&A, in this Form 10-K.
Liquidity Ratios under Basel III
Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III framework dictates banks and bank holding companies measure their liquidity against specific liquidity ratios that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation going forward. One ratio, referred to as the LCR, is designed to ensure that the banking entity maintains high quality liquid assets sufficient to withstand projected cash outflows under a prescribed 30-day liquidity stress scenario. The other ratio, referred to as the NSFR, is designed to promote medium and long-term funding based on the liquidity characteristics of the assets and activities of banking entities over a one-year time horizon. U.S. banking organizations subject to the modified LCR will have until January 1, 2016 to begin calculation under the final LCR rule and will be required to do so on a monthly basis. On October 31, 2014, the Basel Committee on Banking Supervision (BCBS) issued its final rules for the NSFR. U.S. regulators are expected to release a notice of proposed rulemaking for the U.S. NSFR in 2015.
Enhanced Prudential Standards
As directed pursuant to Sections 165 and 166 of the Dodd-Frank Act, the Federal Reserve proposed a rule in 2011 establishing heightened prudential standards applicable to BHCs with assets over $50 billion, including heightened standards for: (i) risk-based capital requirements and leverage limits; (ii) liquidity risk management requirements; (iii) risk management requirements; (iv) stress tests; (v) single counterparty credit exposure limits; and (vi) remedial actions that must be taken, under certain conditions, in the early stages of financial distress (“early remediation”). The capital stress testing rules were finalized in late 2013. In February 2014, the Federal Reserve adopted a final Enhanced Prudential Standards rule implementing the liquidity and risk management requirements in the 2011 proposal, imposing greater supervision and oversight of liquidity and general risk management by boards of directors. The FRB has stated that the liquidity risk management requirements are in
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addition to, and intended to be complementary to, those imposed by the final LCR rule. The FRB has not yet adopted final rules regarding single counterparty exposure limits and early remediation.
Other Regulation
The Federal Reserve and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations. Additionally, these regulatory agencies may require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve risk-based guidelines define a tier-based capital framework. Tier 1 capital includes common shareholders' equity, trust preferred securities, certain non-controlling interests and qualifying preferred stock, less goodwill (net of any qualifying DTL) and other adjustments. Beginning in 2015, a phase out period will begin for trust preferred securities included in Tier 1, resulting in a complete phase-out of Tier 1 by January 1, 2016. These trust preferred securities will become includable in Tier 2 capital. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatorily convertible debt, limited amounts of subordinated debt, other qualifying term debt, the allowance for credit losses up to a certain amount and a portion of the unrealized gain on equity securities. The sum of Tier 1 and Tier 2 capital represents the Company's qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by RWAs. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. Additionally, the Company, and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. The Federal Reserve also requires the Company to calculate, report, and maintain certain levels of Tier 1 common equity. Tier 1 common equity is calculated by taking Tier 1 capital and subtracting certain elements, including perpetual preferred stock and related surplus, non-controlling interests in subsidiaries, trust preferred securities and mandatorily convertible preferred securities. Under the final Basel III rules, as discussed above, the capital requirements for bank holding companies and banks will increase substantially.
The federal banking agencies have broad powers with which to require companies to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “under-capitalized,” “significantly undercapitalized” or “critically undercapitalized,” as such terms are defined under regulations issued by each of the federal banking agencies, including progressively more restrictive constraints on operations, management, and capital distributions. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5.0% of the bank's assets at the time it became “undercapitalized” or the amount needed to comply with the plan. The final capital rules described above amended the prompt
corrective action framework to include the new CET 1 measure and higher minimum capital requirements, effective January 1, 2015, such that the minimum CET 1, Tier 1 risk-based, and total risk based measures required to be “adequately capitalized” will be 4.5%, 6.0%, and 8.0%, respectively, “well-capitalized”, will be at least 2.0% higher in each respective category, and the minimum standard leverage ratio to be adequately capitalized and well-capitalized will be 4.0% and 5.0%, respectively. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. Additionally, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality, and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
Regulators also must take into consideration: (i) concentrations of credit risk; (ii) interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance sheet position); and (iii) risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. Regulators make this evaluation as a part of their regular examination of the institution's safety and soundness. Additionally, regulators may choose to examine other factors in order to evaluate the safety and soundness of financial institutions. The Federal Reserve announced that its approval of certain capital actions, such as dividend increases and stock repurchase, will be tied to the level of CET 1, and that bank holding companies must consult with the Federal Reserve's staff before taking any actions, such as stock repurchases, capital redemptions, or dividend increases, which might result in a diminished capital base.
In addition, there are various legal and regulatory limits on the extent to which the Company's subsidiary bank may pay dividends or otherwise supply funds to the Company. Federal and state bank regulatory agencies also have the authority to prevent a bank or BHC from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice. In the event of the “liquidation or other resolution” of an insured depository institution, the FDIA provides that the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the parent BHC, with respect to any extensions of credit they have made to such insured depository institution.
The standard deposit insurance amount provided by the FDIC is $250,000 per depositor, per insured bank, per ownership category. It provides this insurance through the DIF, which the FDIC maintains by assessing depository institutions an insurance premium. The FDIC assesses deposit insurance premiums on the basis of a depository institution's average consolidated net assets using a premium rate that includes a variety of factors that translate into a complex scorecard.
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FDIC regulations require that management report annually on its responsibility for preparing its institution's financial statements, establishing and maintaining an internal control structure and procedures for financial reporting, and compliance with designated laws and regulations concerning safety and soundness.
The Dodd-Frank Act created the CFPB, which is separated into five units: Research, Community Affairs, Complaint Tracking and Collection, Office of Fair Lending and Equal Opportunity, and Office of Financial Literacy. The CFPB has broad power to adopt new regulations to protect consumers, which power it may exercise at its discretion and so long as it advances the general concept of the protection of consumers. In particular, such regulations may further restrict the Company's banking subsidiary from collecting overdraft fees or limit the amount of overdraft fees that may be collected by the Company's banking subsidiary beyond the limits imposed by the 2009 amendments to Regulation E discussed below.
Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
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 the Federal Reserve's Regulation W, among other things, govern the terms and conditions and limit the amount of extensions of credit by the Bank and its subsidiaries to the Company and other Company subsidiaries, purchases of assets by the Bank and its subsidiaries from the Company and other Company subsidiaries, and the amount of collateral required to secure extensions of credit by the Bank and its subsidiaries to 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, in particular, by including within its scope derivative transactions by and between the Bank or its subsidiaries and the Company or other Company subsidiaries. The Federal Reserve enforces the terms of 23A and 23B and audits the enterprise for compliance.
In October 2011, the Federal Reserve and other regulators jointly issued a proposed rule implementing requirements of a new Section 13 to the BHC Act, commonly referred to as the “Volcker Rule.” The regulatory agencies released final implementing regulations on December 10, 2013, providing for an extended conformance date through July 21, 2015, which has been extended for one year (and is expected to be extended one additional year) for a limited subset of covered fund holdings and activities.
The Volcker Rule generally prohibits the Company and its subsidiaries from (i) engaging in proprietary trading for its own account, (ii) acquiring or retaining an ownership interest in or sponsoring a “covered fund,” and (iii) entering into certain relationships with a “covered fund,” all subject to certain
exceptions. The Volcker Rule also specifies certain limited activities in which the Company and its subsidiaries may continue to engage.
The Volcker Rule will further restrict and limit the types of activities in which the Company and its subsidiaries may engage. Moreover, it will require the Company and its subsidiaries to adopt complex compliance monitoring and reporting systems in order to assure compliance with the rule while engaging in activities that the Company and its subsidiaries currently conduct.
The Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S. It imposes compliance and due diligence obligations; creates crimes and penalties; compels the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S.; and clarifies the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the Patriot Act's requirements or provide more specific guidance on their application. The Patriot Act requires all “financial institutions,” as defined, to establish certain anti-money laundering compliance and due diligence programs. The Patriot Act requires financial institutions that maintain correspondent accounts for non-U.S. institutions, or persons that are involved in private banking for “non-U.S. persons” or their representatives, to establish, “appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts.” Recently the Financial Crimes Enforcement Network, which drafts regulations implementing the Patriot Act and other anti-money laundering and bank secrecy act legislation, proposed a rule that would require financial institutions to obtain beneficial ownership information with respect to all legal entities with which such institutions conduct business. The scope and compliance requirements of such a rule have yet to be formalized or completed. Bank regulators are focusing their examinations on anti-money laundering compliance, and the Company continues to enhance its anti-money laundering compliance programs.
During the fourth quarter of 2011, the Federal Reserve's final rules related to debit card interchange fees became effective. These rules significantly limit the amount of interchange fees that the Company may charge for electronic debit transactions. Similarly, in 2009, the Federal Reserve adopted amendments to its Regulation E that restrict the Company's ability to charge its clients overdraft fees for ATM and everyday debit card transactions. Pursuant to the adopted regulation, clients must opt-in to an overdraft service in order for banks to collect overdraft fees. Overdraft fees represent a significant amount of noninterest fees collected by the Company's banking subsidiary. The CFPB also has amended Regulation E to impose certain disclosure and other requirements on the Company’s provision of electronic funds transfer services for U.S. consumers to recipients in other countries.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and, 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, a bank may
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establish branches across state lines by merging with a bank in another state subject to certain restrictions. A BHC may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another BHC without the prior approval of the Federal Reserve. Under the Dodd-Frank Act, a BHC may not acquire another bank, or engage in new activities that are financial in nature or acquire a non-bank company that engages in activities that are financial in nature, unless the BHC is both "well capitalized" and deemed by the Federal Reserve to be "well managed." Moreover, a bank and its affiliates may not, after the acquisition of another bank, control more than 10% of the amount of deposits of insured depository institutions in the U.S., and a financial company may not merge, consolidate or acquire another company if the total consolidated liabilities of the acquiring financial company after such acquisition exceeds 10% of the aggregated consolidated liabilities of all financial companies at the end of the year preceding the transaction. Additionally, certain states may have limitations on the amount of deposits any bank may hold within that state.
On July 21, 2010, the Federal Reserve 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 for, but contains certain principles which 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 Federal Reserve will monitor compliance with this guidance as part of its safety and soundness oversight.
Competition
The Company's primary operating footprint is in the Southeast and Mid-Atlantic U.S., though certain lines of business serve broader, national markets. Within those markets the Company faces 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 high quality service, while offering a broad range of products and services. The Company believes that this approach better positions it to increase loyalty and expand relationships with current clients and attract new ones. Further, the Company maintains a strong presence within select markets, thereby enhancing its competitive position.
While the Company believes it 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 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 lower cost 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
and gain such access. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This could alter the competitive environment in which the Company conducts business. Some of the Company's competitors have greater financial resources or face fewer regulatory constraints. As a result of these various sources of competition, the Company could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients.
Employees
At December 31, 2014, the Company had 24,638 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 good.
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, of this Form 10-K, and Note 20, “Business Segment Reporting,” to the Consolidated Financial Statements in this Form 10-K); Net Interest Income (under the captions “Net Interest Income/Margin” 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 “Borrowings and Contractual Commitments” in Note 11 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).
SunTrust's Annual Report 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 investors.suntrust.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC's web site address is www.sec.gov.
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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 presently deem to be immaterial also could have a material adverse effect on our financial condition, results of operations, business, and prospects.
As one of the largest lenders in the Southeast and Mid-Atlantic U.S. and a provider of financial products and services to consumers and businesses across the U.S., our financial results have been, and may continue to be, materially affected by general economic conditions. 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, wholesale, and mortgage banking businesses. These businesses have been, and may continue to be, materially affected by the state of the U.S. economy, particularly unemployment levels and home prices. Although the U.S. economy has continued to gradually improve from severely depressed levels during the last economic recession, economic growth and improvement in the housing market have been modest. In addition, financial uncertainty stemming from low oil and commodity prices, a strong U.S. dollar, U.S. debt and budget matters, geopolitical turmoil, 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 any deterioration in general economic conditions and/or the financial markets resulting from the above matters, or any other events or factors that may disrupt or dampen the global economic recovery, could materially adversely affect our financial results and condition.
If unemployment levels increase or if home prices decrease we would expect to incur higher than normal 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 experience deteriorating economic conditions. The ability of these borrowers to repay their loans may be reduced, causing us to incur significantly higher credit losses. In addition, current economic conditions have made it more challenging for us to increase our consumer and commercial loan portfolios by making loans to creditworthy borrowers at attractive yields. If economic conditions do not continue to improve or if the economy worsens and unemployment rises, then a decrease in consumer and business confidence and spending are likely, which may reduce demand for our credit products, which would adversely affect our interest and fee income and our earnings.
A deterioration in business and economic conditions that erodes consumer and investor confidence levels, and/or increased volatility of financial markets, 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 market prices 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 also can adversely affect our trading and debt and equity underwriting and advisory businesses.
Legislation and regulation, including the Dodd-Frank Act, as well as future legislation and/or regulation, could require us to change certain of our business practices, reduce our revenue, impose additional costs on us, or otherwise adversely affect our business operations and/or competitive position.
We are actively regulated by federal and state agencies. Changes to statutes, regulations, or regulatory policies, including interpretation or implementation of statutes, regulations, or policies, could affect us adversely, including limiting the types of financial services and products we may offer and/or increasing the ability of nonbanks to offer competing financial services and products. Also, if we do not comply with laws, regulations, or policies, we could be subject to regulatory sanctions and damage to our reputation.
Regulation of the financial services industry has increased significantly. The regulation is focused on the protection of depositors, FDIC funds, consumers, and the banking system as a whole, rather than our shareholders, and may be adverse to the interests of our shareholders. We are subject to significant regulation under state and federal laws in the U.S., including new legislation and rule-making promulgated under the Dodd-Frank Act. Increased supervision, reporting, and significant new and proposed legislation and regulatory requirements in the U.S. and in other jurisdictions outside of the U.S. where we conduct business may affect the manner in which we do business and the products and services that we provide, and may affect or restrict our ability to compete in our current businesses or our ability to enter into or acquire new businesses, reduce or limit our revenue in businesses or impose additional fees, assessments or taxes on us, and adversely affect our business operations or have other negative consequences.
A significant number of the provisions of the Dodd-Frank Act still require extensive rulemaking and interpretation by regulatory authorities. In several cases, authorities have extended implementation periods and delayed effective dates. Accordingly, in many respects the ultimate impact of the Dodd-Frank Act and its effects on the U.S. financial system and SunTrust will not be known for an extended period of time. Nevertheless, the Dodd-Frank Act, including current and future rules implementing its provisions and the interpretation of those rules, could result in a loss of revenue, require us to change certain of our business practices, limit our ability to pursue certain business opportunities, increase our capital and liquidity requirements and impose additional assessments and costs on
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us, and otherwise adversely affect our business operations and have other negative consequences. For example, on October 1, 2011, final rules issued by the Federal Reserve became effective which limit the fees we can charge for debit card interchange, and this has reduced our noninterest income. In addition, several recent legislative and regulatory initiatives were adopted that have had an impact on our businesses and financial results, including FRB and CFPB amendments to Regulation E which, among other things, affect the way we may charge overdraft fees and our provision of electronic funds transfer services for U.S. consumers to recipients in other countries. We also implemented policy changes to help customers limit overdraft and returned item fees. These reduced our fee revenue.
The Dodd-Frank Act also established the CFPB, which has authority to regulate, among other things, unfair, deceptive, or abusive acts or practices. The CFPB has been active in rule-making and enforcement activity, and already has imposed substantial fines on other financial institutions. Among its other consumer-protective initiatives, the CFPB has placed significant emphasis on consumer complaint management. The CFPB has established a public consumer complaint database to encourage consumers to file complaints they may have against financial institutions, which the CFPB may use to focus enforcement actions and for rule-making. In addition, each financial institution is expected to maintain an effective consumer complaint management program. Further, in 2013 the CFPB released final regulations under Title XIV of the Dodd-Frank Act in 2013 further regulating the origination of mortgages and addressing "ability to repay" standards, loan officer compensation, appraisal disclosures, HOEPA triggers and other matters. The "ability to repay" rule, in particular, has the potential to significantly affect our business since it provides a borrower with a defense to foreclosure unless the lender established the borrower's ability to repay or that the loan was a "qualified mortgage" or met other exceptions to the rule. While qualified mortgages may provide certain safe harbors, the extent of these safe harbors remains unclear. Our business strategy, product offerings, and profitability may be affected by CFPB rules and may change as these and other rules are developed, become effective, and are interpreted by the regulators and courts.
Regulators recently published revised guidance which could affect the origination and distribution of leveraged loans. While we believe we comply with relevant regulatory requirements, regulators may limit the ability of banks to originate leveraged loans, such as by limiting the maximum leverage of issuers of such loans, or may limit the extent to which banks may hold leveraged loans in their loan portfolios. If regulators tighten leverage limits, structural elements including covenants or maturities, such actions could result in lower loan origination volumes and fees. If regulators impose portfolio limits, this could reduce the liquidity of leveraged loans, and may indirectly affect their value.
A portion of our revenue comes from fees we charge clients for certain services that we provide to them, including fees for having insufficient funds in their accounts. The CFPB may issue rules that limit the fees we may charge, such as by setting a dollar or number limit to the amount of such fees. Other regulatory changes may cause us to change the order in which we process
checks. Any of these changes might adversely affect fee revenue.
Additionally, legislation or regulation may impose unexpected or unintended consequences, the impact of which is difficult to predict. For example, some commentators have expressed a view that proposed liquidity requirements, which will require certain banks to hold more liquid securities, may have the unintended consequence of reducing the size of the trading markets for such securities, and thereby reduce liquidity in those markets.
Any other future legislation and/or regulation, if adopted, also could have a material adverse effect on our business operations, income, and/or competitive position and may have other negative consequences. For additional information, see the “Government Supervision and Regulation” section in this Form 10-K.
We are subject to changing capital adequacy and liquidity guidelines and, if we fail to meet these new guidelines, our financial condition would be adversely affected.
We, together with our banking subsidiary and broker-dealer subsidiaries, must meet certain capital and liquidity guidelines, subject to qualitative judgments by regulators about components, risk weightings, and other factors. New regulatory capital and liquidity requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases, and may require us to increase our capital and/or liquidity. Any requirement that we increase our regulatory capital, replace certain capital instruments which presently qualify as Tier 1 capital, or increase regulatory capital ratios or liquidity, could require us to liquidate assets or otherwise change our business and/or investment plans, which may adversely affect our financial results. Issuing additional common stock would dilute the ownership of existing stockholders. Specifically, our primary regulatory, along with other banking regulators, have implemented new and more stringent capital and liquidity measurements that will impact us.
In July 2013, the Federal Reserve issued final capital rules that replace existing capital adequacy rules and implement Basel III and certain requirements imposed by the Dodd-Frank Act. These rules will result in higher and more stringent capital requirements for us and our banking subsidiary than under the prior rules. Under the final rules, our capital requirements will increase and the risk-weighting of many of our assets will change. Further, in September, 2014, the Federal Reserve adopted a final LCR rule under the Basel III framework that requires banks and bank holding companies to measure their liquidity against specific liquidity tests. The tests, which include an LCR, are designed to ensure that the banking entity maintains a level of unencumbered high-quality liquid assets greater than or equal to the entity's expected net cash outflow for a specified time horizon under an acute liquidity stress scenario. Also part of the LCR rule, an NSFR was designed to promote more medium and long-term funding based on the liquidity characteristics of the assets and activities of banking entities over a one-year time horizon. Under the LCR rule our holdings of high-quality liquid assets will increase and the composition of our balance sheet will change.
Under the final capital rules, Tier 1 capital will consist of CET 1 and additional non-common Tier 1 capital, with Tier 1
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capital plus Tier 2 capital constituting total risk-based capital. The required minimum capital requirements will be greater than currently required and include a CET 1 ratio of 4.5%; a Tier 1 capital ratio of 6%, and a total capital ratio of 8%. In addition, a Tier 1 leverage ratio to average consolidated assets of 4% will apply. Further, we will be required to maintain a capital conservation buffer of 2.5% of additional CET 1 after a transition period to phase-in the buffer. If we do not maintain the capital conservation buffer, then our ability to pay dividends and discretionary bonuses and to make share repurchases will be restricted.
A transition period applies to certain capital elements and risk weighted assets. One of the more significant transitions required by the final rules relates to the risk weighting applied to MSRs, which will impact the CET1 ratio during the transition period when compared to the currently disclosed 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%. The transition period is applicable from January 1, 2015 through December 31, 2017.
We have estimated our regulatory capital under Basel III under the final rules and we provide that estimate, on a fully phased-in basis, and a reconcilement to U.S. GAAP in Table 34, “Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures” in Item 7, MD&A, in this Form 10-K. Note that this estimate is consistent with our interpretation of the final rule and ambiguities in the final rule or other interpretations of the final rule could result in a larger measure of RWAs and consequently a lower CET 1 ratio.
Loss of customer deposits and market illiquidity could increase our funding costs.
We rely heavily on bank deposits to be 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. Higher funding costs reduce our net interest margin and net interest income.
We rely on the mortgage secondary market and GSEs for some of our liquidity.
We sell most of the mortgage loans 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. We rely on other capital markets investors to purchase non-conforming loans (i.e., loans that do not meet GSE requirements). Since 2007, investor demand for nonconforming loans has fallen sharply, increasing credit spreads and reducing the liquidity of those loans. In response to the reduced liquidity in the capital markets, we may retain more nonconforming loans, negatively impacting reserves, or we may originate less, negatively impacting 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). As previously noted, 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 regarding the housing finance market and the GSEs, as well as any effect on our business and financial results, are uncertain.
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, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. The recent financial and credit crisis and resulting regulatory reform highlighted both the importance and some of the limitations of managing unanticipated risks. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.
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 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. As one of the nation's largest lenders, 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 forecasts of economic conditions and how these 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 home 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.
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While we believe that our allowance for credit losses was adequate at December 31, 2014, there is no assurance that it will be sufficient to cover all incurred credit losses, especially if economic conditions worsen. In the event of significant deterioration in economic conditions, we may be required to increase reserves in future periods, which would reduce our earnings. For additional information, see the “Risk Management-Credit Risk Management” and “Critical Accounting Policies-Allowance for Credit Losses” sections of the MD&A in this Form 10-K.
Our ALLL may not be adequate to cover our eventual losses.
Like other financial institutions, we maintain an ALLL to provide for credit losses associated with loan defaults and nonperformance. Our ALLL is based on our evaluation of risks associated with our LHFI portfolio, including historical loss experience, expected loss calculations, delinquencies, performing status, the size and composition of the loan portfolio, economic conditions, and concentrations within the portfolio. Current economic conditions in the U.S. and in our markets could deteriorate, which could result in, among other things, greater than expected deterioration in credit quality of our loan portfolio or in the value of collateral securing these loans. Our ALLL may not be adequate to cover eventual loan losses, and future provisions for loan losses could materially and adversely affect our financial condition and results of operations. Additionally, in order to maximize the collection of loan balances, we sometimes modify loan terms when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. If such modifications ultimately are less effective at mitigating loan losses than we expect, we may incur losses in excess of the specific amount of ALLL associated with a modified loan, and this would result in additional provision for loan losses.
In 2012, the FASB issued for public comment a Proposed ASU, Financial Instruments-Credit Losses (Subtopic 825-15) (the Credit Loss Proposal), that would substantially change the accounting for credit losses under U.S. GAAP. Under U.S. GAAP's current standards, credit losses are not reflected in the financial statements until it is probable that the credit loss has been incurred. Under the Credit Loss Proposal, an entity would reflect in its financial statements its current estimate of credit losses on financial assets over the expected life of each financial asset. The Credit Loss Proposal, if adopted as proposed, may have a negative impact on our reported earnings, capital, regulatory capital ratios, as well as on regulatory limits which are based on capital (e.g., loans to affiliates) since it would accelerate the recognition of estimated credit losses.
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. As Florida is our largest banking state in terms of loans and deposits, deterioration in real estate values and underlying
economic conditions in those markets or elsewhere could result in materially higher credit losses. A 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 in the MD&A and Notes 6 and 7, “Loans” and “Allowance for Credit Losses”, to the Consolidated Financial Statements in this Form 10-K.
A downgrade in the U.S. government's sovereign credit rating, or in the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in risks to us and general economic conditions that we are not able to predict.
On August, 5, 2011, S&P downgraded the credit rating of the U.S. government from AAA to AA+. Subsequently, on June 10, 2013, S&P reaffirmed its government bond rating of the U.S. at AA+, while also raising its outlook from “Negative” to “Stable.” On July 18, 2013, Moody’s reaffirmed the government bond rating of the U.S. at Aaa, while raising the outlook from “Negative” to “Stable.” Further, on March 21, 2014, Fitch upgraded its AAA rating of U.S. government debt from “Ratings Watch Negative” to "Stable."
While the risk of a sovereign credit ratings downgrade of the U.S. government, including the rating of U.S. Treasury securities, has been reduced, the possibility still remains. It is foreseeable that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government could also be correspondingly affected by any such downgrade. Instruments of this nature are key assets on the balance sheets of financial institutions, including us, and are widely used as collateral by financial institutions to meet their day-to-day cash flows in the short-term debt market.
A downgrade of the sovereign credit ratings of the U.S. government and the perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on us. In addition, we presently deliver a material portion of the residential mortgage loans we originate to government-sponsored institutions, agencies or instrumentalities (or instruments insured or guaranteed thereby). We cannot predict if, when or how any changes to the credit ratings of these organizations will affect their ability to finance residential mortgage loans. Such ratings actions, if any, could result in a significant change to our mortgage business. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies, or instrumentalities would significantly exacerbate the other risks to which we are subject and any related adverse effects on our business, financial condition, and results of operations.
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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, borrower fraud, or certain breaches of our servicing agreements, 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 securitization, we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Between 2006 and 2013, we received an elevated number of repurchase and indemnity demands from purchasers. These resulted in an increase in the amount of losses for repurchases.
In September 2013, we reached a settlement with Fannie Mae and Freddie Mac to address outstanding and potential repurchase obligations. However, the 2013 agreements with Fannie Mae and Freddie Mac settling certain aspects of our repurchase obligations preserve their right to require repurchases arising from certain types of events, and that preservation of rights can impact our future losses. While the repurchase reserve includes the estimated cost of settling claims related to required repurchases, our estimate of losses depends on our assumptions regarding GSE and other counterparty behavior, loan performance, home prices, and other factors. For additional information, see Note 16, “Guarantees,” to the Consolidated Financial Statements in this Form 10-K, and the following sections of the MD&A in this Form 10-K-”Noninterest Income” and “Critical Accounting Policies.”
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 19, “Contingencies,” to the Consolidated Financial Statements and “Critical Accounting Policies” of the MD&A in this Form 10-K.
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.
We face certain 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 to 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 securitization or other investor agreement, considering 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, the costs to perform contracted-for services has increased, which reduces our profitability. As a servicer, we advance expenses on behalf of investors which we may be unable to collect. Further, 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.
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 may incur costs if we are required to, or if we elect to, re-execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the required process was not followed. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or defective, we could be obligated to cure the defect or repurchase the loan. We may incur a liability to securitization investors relating to delays or deficiencies in our processing of mortgage assignments or other documents necessary to comply with state law governing foreclosures. The fair value of our MSRs may be adversely affected to the extent our servicing costs increase because of higher foreclosure costs. Any of these actions may harm our reputation or adversely affect our residential mortgage origination or servicing business.
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We are subject to risks related to delays in the foreclosure process.
When we originate a mortgage loan, we do so with the expectation that if the borrower defaults, our ultimate loss is mitigated by the value of the collateral which secures the mortgage loan. Our ability to mitigate our losses on such defaulted loans depends upon our ability to promptly foreclose upon such collateral after an appropriate cure period. In some states, the large number of foreclosures which have occurred has resulted in delays in foreclosing. In some instances, our practices or failures to adhere to our policies have contributed to these delays. Any delay in the foreclosure process will adversely affect us by increasing our expenses related to carrying such assets, such as taxes, insurance, and other carrying costs, and exposes us to losses as a result of potential additional declines in the value of such collateral.
Our earnings may be affected by volatility in mortgage production and servicing revenues, and by changes in carrying values of our MSRs and mortgages held for sale due to changes in interest rates.
We earn revenue from fees we receive for originating mortgage loans and for servicing mortgage loans. When rates rise, the demand for mortgage loans usually tends to fall, reducing the revenue we receive from loan originations (mortgage production revenue).
Changes in interest rates can affect prepayment assumptions and thus the fair value of our MSRs. An MSR is the right to service a mortgage loan-collect principal, interest and escrow amounts-for a fee. When interest rates fall, borrowers are usually more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of our MSRs can decrease. Each quarter we evaluate the fair value of our MSRs and any related hedges, and any decrease in fair value reduces earnings in the period in which the decrease occurs.
Similarly, we measure at fair value prime mortgages held for sale for which an active secondary market and readily available market prices exist. We also measure at fair value certain other interests we hold related to residential loan sales and securitizations. Similar to other interest-bearing securities, the value of these mortgages held for sale and other interests 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. We may not hedge this risk, and even if we do hedge the risk with derivatives and other instruments, we may still incur significant losses from changes in the value of these mortgages held for sale and other interests or from changes in the value of the hedging instruments. For additional information, see “Enterprise Risk Management-Other Market Risk” and “Critical Accounting Policies” in the MD&A, and Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in this Form 10-K.
We use derivatives to hedge the risk of changes in the fair value of the MSR, exclusive of decay. The hedge may not be effective and may cause volatility, or losses, in our mortgage servicing income. Also, we typically use derivatives and other instruments to hedge our mortgage banking interest rate risk.
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. 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 mortgage banking interest rate risk. For additional information, see Note 17, “Derivative Financial Instruments,” to the Consolidated Financial Statements in this Form 10-K.
Changes in market interest rates or capital markets could adversely affect our revenue and expense, 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 on our balance sheet. We are also exposed to market risk in our trading instruments, AFS investment portfolio, MSRs, loan warehouse and pipeline, and debt and brokered deposits carried at fair value. 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 the 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; |
• | The value of certain balance sheet and off-balance sheet financial instruments that we hold could decline; |
• | The value of our pension plan assets could decline, thereby potentially requiring us to further fund the plan; or |
• | To the extent we access capital markets to raise funds to support our business, such changes could affect the cost of such funds or the ability to raise such funds. |
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 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
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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 rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the asset yield catches up.
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 yield. In addition, we may invest in lower yielding investment securities for a variety of reasons.
Changes in the slope of the “yield curve,” or the spread between short-term and long-term interest rates, 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" section 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.
We may not hedge all of our interest rate risk. There is always the risk that changes in interest rates could reduce our net interest income and our earnings in material amounts, especially if actual conditions turn out to be materially different than what we assumed. For example, if interest rates rise or fall faster than we assumed or the slope of the yield curve changes, we may incur significant losses on debt securities we hold as investments. To reduce our interest rate risk, we may rebalance our investment and loan portfolios, refinance our debt, and take other strategic actions. We may incur losses when we take such actions. For additional information, see the “Enterprise Risk Management” and "Net Interest Income/Margin" sections of the MD&A 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 contingent 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 participating in the capital markets, or a downgrade of our debt
rating, may adversely affect our funding costs and our ability to raise funding and, in turn, our liquidity.
The fiscal and monetary 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 determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. They can also materially decrease the value of financial assets we hold, such as debt securities and MSRs. 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 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 difficult to predict. Also, potential new taxes on corporations generally, or on financial institutions specifically, would adversely affect our net income.
Clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding.
Checking and savings account balances and other forms of client deposits could decrease 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.
Consumers may decide not to use banks to complete their financial transactions, which could affect net income.
Technology and other changes now allow parties to complete financial transactions without banks. For example, consumers can pay bills and transfer funds directly without banks. This process could result in the loss of fee income, as well as the loss of client deposits and the income generated from those deposits.
We have businesses other than banking which subject us to a variety of risks.
We are a diversified financial services company. This diversity subjects earnings to a broader variety of risks and uncertainties. Other businesses include investment banking, securities underwriting and retail and wholesale brokerage services offered through our subsidiaries. Securities underwriting, loan syndications and securities market making 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 financial crisis and other matters
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affecting the financial services industry, including mortgage foreclosure issues. Negative public opinion regarding us could result from our actual or alleged conduct in any number of activities, including lending practices, 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 keep and 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.
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 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.
We are at risk of increased losses from fraud.
Recently, we have seen an increase in the frequency and sophistication of fraudulent activity. Criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings which allows them to be more effective.
The fraudulent activity has taken many forms, ranging from check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against third parties. For example, in 2014 several national retail merchants suffered data compromises involving the personal and payment card information of SunTrust customers. The perpetrators of this fraud executed unauthorized charges against SunTrust account holders which we were required to reimburse. While we may be entitled to full or partial indemnification from such merchants for their failure to protect our client’s personal data, there can be no assurance that we will receive such indemnification, that it will be adequate, or that it will cover other losses such as lost profits or costs to reissue payment cards. Further, as a result of increased fraud activity, we have increased our spending on systems to detect and prevent fraud, and may need to make further investments in the future.
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.
We depend upon our ability to process, record, and monitor a large number of client transactions on a continuous basis. As client, public, and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. 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, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber-attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our businesses and clients.
Information security risks for large financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, our operations rely on the secure processing, transmission, and storage of confidential information in our computer systems and networks. Our banking, brokerage, investment advisory, and capital markets businesses rely on our digital technologies, computer and email systems, software, and networks to conduct their operations. In addition, to access our products and services, our clients may use personal smartphones, tablet PCs, personal computers, and other mobile devices or software that are beyond our control. Although we have information security procedures and controls in place, our technologies, systems, networks, and our 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 or destruction of our or our clients' confidential, proprietary and other information, or otherwise disrupt our or our clients' or other third parties' business operations. The Internet and computing devices in general are prime targets for criminals who utilize sophisticated technology to seek, discover and exploit vulnerabilities that may, or may not, be generally known. In 2014 several vulnerabilities in core Internet security technologies were announced and widely publicized in the media. These vulnerabilities increased the potential of loss or compromise for users of the Internet until specific actions were taken by the user or entities outside our direct control. SunTrust experienced no material loss or disruption of services relating to these vulnerabilities.
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Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, 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.
Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our prominent size and scale and our role in the financial services industry, our plans to continue to implement our internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our clients when and how they want to be served, our expanded geographic footprint, the outsourcing of some of our business operations, and the continued uncertain global economic environment. As a result, cybersecurity and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data and networks from attack, damage, or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities.
As a necessary aspect of operating our business we must provide access to customer and sensitive company information to our employees, contractors, consultants, third parties and other authorized entities. Controls and oversight mechanisms are in place to limit access to this information and protect it from unauthorized disclosure or theft. Control systems and policies pertaining to system access are subject to errors in design, oversight failure, software failure, intentional subversion or other compromise resulting in theft, error, loss or inappropriate use of information or systems to commit fraud, cause embarrassment to the company or its executives or to gain competitive advantage.
Additionally, the FRB, the CFPB, and other regulators expect financial institutions to be responsible for all aspects of their performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber-attacks or security breaches of the networks, systems, devices, or software that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
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, 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 institution, 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 the financial instrument exposure due us. 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 counterparties, including financial statements and other 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.
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 elect to become financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking, and may acquire banks and other financial institutions. This may significantly change 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.
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
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products and services to evolving industry standards. 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. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new 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 might not pay dividends on our stock.
Holders of our stock are only entitled to receive such dividends as our Board may declare 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.
Further, in February 2009, the Federal Reserve required bank holding companies to substantially reduce or eliminate dividends. Since that time, the Federal Reserve has indicated that increased capital distributions would generally 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 will require the approval of the Federal Reserve. Refer to the discussion under the caption “We are subject to capital adequacy and liquidity guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected,” above.
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 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. 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 common stock. Additionally, if our subsidiaries' earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we
may not be able to make dividend payments to our common stockholders.
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 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. Among our various retail and wholesale funding sources, credit ratings have a more direct impact on the cost of wholesale funding, as our primary source of retail funding is bank deposits, most of which are insured by the FDIC. See Item 7, MD&A, "Liquidity Risk Management.”
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, financial condition, future prospects, including current and projected capital levels, the competence, experience, and integrity of management, 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. In addition, 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
16
acquisition despite the time and expenses invested in pursuing it.
Additionally, our regulatory requirements increase as our size increases. We become subject to enhanced capital and liquidity requirements once our assets exceed $250 billion, and our regulators likely would expect us to begin voluntarily complying with those requirements as we approach that size.
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. During the recent credit crisis, we have seen both the number of cases and our expenses related to those cases increase. The outcome 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 still 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.
For example, on October 10, 2013, we announced that we reached agreements in principle with the HUD and the U.S. DOJ to settle (i) certain civil and administrative claims arising from FHA-insured mortgage loans originated by STM from January 1, 2006 through March 31, 2012 and (ii) certain alleged civil claims regarding our mortgage servicing and origination practices as part of the National Mortgage Servicing Settlement. Pursuant to the combined settlement, we agreed to pay $468 million. In addition, we agreed to provide $500 million of consumer relief and to implement certain mortgage servicing standards.
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 the 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 begun pursuing 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.
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, especially our Chairman and CEO, William H. Rogers, Jr., and other key personnel who have extensive experience in the industry. We generally do not carry key person life insurance on any of the executive officers or other key personnel. If we lose the services of any of these integral personnel and fail to manage a smooth transition to new personnel, the 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 turnover, 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 restricts the amount, form, and context in which we pay incentive compensation.
Our accounting policies and processes are critical to how we report our financial condition and results of operations. 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 operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities
17
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 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 Item 7, MD&A, "Critical Accounting Policies,” Note 1, “Significant Accounting Policies,” and Note 18, "Fair Value Election and Measurement," 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 standards (such as the FASB, SEC, banking regulators and our outside auditors) may change or even reverse their previous 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 statements.
Our financial instruments carried at fair value expose us to certain market risks.
We maintain at fair value a securities AFS portfolio and trading assets and liabilities and derivatives, which include various types of instruments and maturities. Additionally, we elected to record selected fixed-rate debt, mortgage loans, MSRs and other financial instruments at fair value. Changes in fair value of the financial instruments carried at fair value are recognized in earnings. The financial instruments carried at fair value are exposed to market risks related to changes in interest rates, market liquidity, and our market-based credit spreads, as
well as to the risk of default by specific borrowers. We manage the market risks associated with these instruments through active hedging arrangements or broader ALM strategies. Changes in the market values of these financial instruments could have a material adverse impact on our financial condition or results of operations. We may classify additional financial assets or financial liabilities at fair value in the future. See Note 18, “Fair Value Election and Measurement" in this Form 10-K.
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.
These inherent limitations include the realities that 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 the restatement of previously filed financial statements.
Our stock price can be volatile.
Our stock price can fluctuate widely in response to a variety of factors including:
• | 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; |
• | 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; and |
• | 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 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
18
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.
Our revenues derived from our investment securities may be volatile and subject to a variety of risks.
We generally maintain investment securities and trading positions in the fixed income, currency, and equity markets. Unrealized gains and losses associated with our investment portfolio and mark-to-market gains and losses associated with our trading portfolio are affected by many factors, including interest rate volatility, volatility in capital markets, and other economic factors. Our return on such investments and trading have in the past experienced, and will likely in the future experience, volatility and such volatility may materially adversely affect our financial condition and results of operations. Additionally, accounting regulations may require us to record a charge prior to the actual realization of a loss when market valuations of such securities are impaired and such impairment is considered to be other than temporary.
We may enter into transactions with off-balance sheet affiliates.
We engage in a variety of transactions with off-balance sheet entities with which we are affiliated. While we have no obligation, contractual or otherwise, to do so, under certain limited circumstances these transactions may involve providing some form of financial support to these entities. Any such actions may cause us to recognize current or future gains or losses. Depending on the nature and magnitude of any transaction we enter into with off-balance sheet entities, accounting rules may require us to consolidate the financial results of these entities with our financial results.
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, 2014, the Bank operated 1,445 full-service banking offices, of which 569 were owned and the remainder were leased. The full-service banking offices are located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, 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 further discussion of our properties.
Item 3. | LEGAL PROCEEDINGS |
For information regarding the Company's legal matters, see Note 19, “Contingencies,” to the Consolidated Financial Statements in Item 8 of this Form 10-K, which is incorporated herein by reference.
Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
Item 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
The principal market in which our common stock is traded is the NYSE. See Item 6 and Table 34 in the MD&A for information on the high and the low sales prices of SunTrust common stock, which is incorporated herein by reference. During the year ended December 31, 2014, we paid a quarterly dividend on common stock of $0.10 per common share for the first quarter and $0.20 per common share for each of the second, third, and fourth quarters, compared to a quarterly dividend on common stock of $0.05 per common share for the first quarter of 2013 and $0.10 per common share for each of the second, third, and fourth quarters during 2013. Our common stock was held of record by 26,511 holders at December 31, 2014. See "Unregistered Sales of Equity Securities and Use of Proceeds" below for information on share repurchase activity, announced programs, and the remaining buy back authority under the announced programs, which is incorporated herein by reference.
Please also refer to Item 1, “Business—Government Supervision and Regulation,” for a discussion of legal
restrictions that affect our ability to pay dividends; Item 1A, “Risk Factors,” for a discussion of some risks related to our dividend, and Item 7, “MD&A—Capital Resources,” for a discussion of the dividends paid during the year and factors that may affect the future level of dividends.
The information under the caption “Equity Compensation Plans” in our definitive proxy statement to be filed with the SEC is incorporated by reference into this Item 5.
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on our common stock against the cumulative total return of the S&P Composite-500 Stock Index and the S&P Commercial Bank Industry Index for the five years commencing December 31, 2009 and ending December 31, 2014. The foregoing analysis assumes an initial $100 investment in our stock and each index, and the reinvestment of all dividends during the periods presented.
Cumulative Total Return for the Years Ended December 31 | ||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||
SunTrust Banks, Inc. | 100.00 | 145.64 | 88.02 | 141.50 | 184.92 | 213.45 | ||||||||||||
S&P 500 | 100.00 | 114.82 | 117.18 | 135.09 | 176.07 | 198.47 | ||||||||||||
S&P Commercial Bank Index | 100.00 | 119.76 | 107.04 | 131.99 | 176.50 | 202.06 | ||||||||||||
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Share Repurchases
SunTrust did not 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, or warrants to purchase common stock during the year ended December 31, 2014, 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, or the Series F Preferred Stock Depositary Shares.
On September 12, 2006, SunTrust issued and registered under Section 12(b) of the Exchange Act, 20 million depositary shares, each representing a 1/4,000th interest in a share of Perpetual Preferred Stock, Series A. In 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.
On March 30, 2011, the Company repurchased $3.5 billion of Fixed Rate Cumulative Preferred Stock-Series C, and $1.4 billion of Fixed Rate Cumulative Preferred Stock-Series D, which was issued to the U.S. Treasury under the CPP. Warrants to purchase common stock issued to the U.S. Treasury in connection with the issuance of Series C and D preferred stock remained outstanding. The Board authorized the Company to repurchase all of the remaining outstanding warrants to purchase our common stock that were issued to the U.S. Treasury in connection with its investment in SunTrust Banks, Inc. under the CPP. On September 28, 2011, the Company purchased and retired 4 million warrants to purchase SunTrust common stock
in connection with the U.S. Treasury's resale, via a public secondary offering of the warrants that the Treasury held. At December 31, 2014, 13.9 million warrants remained outstanding and the Company had authority from its Board to repurchase all of the 13.9 million outstanding stock purchase warrants. However, any such repurchase would be subject to the prior approval of the Federal Reserve through the capital planning and stress testing process.
On December 15, 2011, SunTrust 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") to SunTrust Preferred Capital I. The Series B Preferred Stock by its terms is redeemable by the Company at $100,000 per share plus any declared and unpaid dividends.
On December 13, 2012, SunTrust issued depositary shares representing ownership interest in 4,500 shares 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 by its terms is redeemable by the Company at $100,000 per share plus any declared and unpaid dividends.
On November 4, 2014, SunTrust issued depositary shares representing ownership interest in 5,000 shares of Perpetual Preferred Stock-Series F, no par value and $100,000 liquidation preference per share (the "Series F Preferred Stock"). The Series F Preferred Stock by its terms is redeemable after 2019 by the Company at $100,000 per share plus any declared and unpaid dividends.
21
Share repurchases during the year ended December 31, 2014:
Common Stock 1 | |||||||
Total number of shares purchased 2 | Average price paid per share | Number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs at period end ($ in millions) | ||||
January 1 - 31 3 | 1,354,345 | $36.92 | 1,354,345 | $— | |||
February 1 - 28 | — | — | — | — | |||
March 1 - 31 | 17,940 | 37.36 | — | — | |||
Total during first quarter of 2014 | 1,372,285 | 36.92 | 1,354,345 | — | |||
April 1 - 30 | 2,009,900 | 39.76 | 2,009,900 | 370 | |||
May 1 - 31 | 79,000 | 37.96 | 79,000 | 367 | |||
June 1 - 30 | — | — | — | 367 | |||
Total during second quarter of 2014 | 2,088,900 | 39.69 | 2,088,900 | 367 | |||
July 1 - 31 | 1,872,900 | 40.04 | 1,872,900 | 292 | |||
August 1 - 31 | 263,200 | 37.99 | 263,200 | 282 | |||
September 1 - 30 4 | 3,344,700 | 38.87 | — | 282 | |||
Total during third quarter of 2014 | 5,480,800 | 39.23 | 2,136,100 | 282 | |||
October 1 - 31 | 2,924,190 | 37.62 | 2,924,190 | 172 | |||
November 1 - 30 | — | — | — | 172 | |||
December 1 - 31 | — | — | — | 172 | |||
Total during fourth quarter of 2014 | 2,924,190 | 37.62 | 2,924,190 | 172 | |||
Total year-to-date 2014 | 11,866,175 | $38.65 | 8,503,535 | $172 | |||
1 On March 26, 2014, the Company announced that the Federal Reserve had no objections to the repurchase of up to $450 million of the Company's outstanding common stock, to be completed between April 1, 2014 and March 31, 2015, as part of the Company's capital plan submitted in connection with the 2014 CCAR. The repurchases are limited to the extent that the Company's issuances of capital stock, including employee share-based compensation, are less than the amount indicated in the 2014 CCAR capital plan. During 2014, the Company repurchased approximately $278 million of its outstanding common stock at market value as part of this publicly announced plan. Additionally, during January 2015, the Company repurchased $50 million of its outstanding common stock at market value, and the Company expects to repurchase between $60 million and $70 million of additional outstanding common stock through the end of the first quarter of 2015, which would complete the repurchase of authorized shares as approved by the Board and the Federal Reserve in conjunction with the 2014 capital plan.
2 Includes shares repurchased pursuant to SunTrust's employee stock option plans, pursuant to which participants may pay the exercise price upon exercise of SunTrust stock options by surrendering shares of SunTrust common stock, which the participant already owns. SunTrust considers shares so 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. During 2014, 17,940 shares of SunTrust common stock were surrendered by participants in SunTrust's employee stock option plans at an average price of $37.36 per share.
3 During January 2014, the Company repurchased $50 million of its outstanding common stock at market value, which completed the repurchase of authorized shares as approved by the Board and the Federal Reserve in conjunction with the 2013 capital plan. The 2013 capital plan was initially announced on March 14, 2013 and effectively expired on March 31, 2014.
4 During September 2014, the Company repurchased $130 million of its outstanding common stock at market value upon receiving a non-objection from the Federal Reserve. This repurchase was incremental to and separate from the Company's March 26, 2014 announced repurchase of up to $450 million of the Company's outstanding common stock to be completed between April 1, 2014 and March 31, 2015, as part of the Company's capital plan submitted in connection with the 2014 CCAR.
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Item 6. SELECTED FINANCIAL DATA | |||||||||||||||||||
Year Ended December 31 | |||||||||||||||||||
(Dollars in millions and shares in thousands, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Summary of Operations: | |||||||||||||||||||
Interest income | $5,384 | $5,388 | $5,867 | $6,181 | $6,343 | ||||||||||||||
Interest expense | 544 | 535 | 765 | 1,116 | 1,489 | ||||||||||||||
Net interest income | 4,840 | 4,853 | 5,102 | 5,065 | 4,854 | ||||||||||||||
Provision for credit losses | 342 | 553 | 1,395 | 1,513 | 2,651 | ||||||||||||||
Net interest income after provision for credit losses | 4,498 | 4,300 | 3,707 | 3,552 | 2,203 | ||||||||||||||
Noninterest income | 3,323 | 3,214 | 5,373 | 3,421 | 3,729 | ||||||||||||||
Noninterest expense 1 | 5,543 | 5,831 | 6,284 | 6,194 | 5,867 | ||||||||||||||
Income before provision/(benefit) for income taxes | 2,278 | 1,683 | 2,796 | 779 | 65 | ||||||||||||||
Provision/(benefit) for income taxes 1 | 493 | 322 | 812 | 119 | (141 | ) | |||||||||||||
Net income attributable to noncontrolling interest | 11 | 17 | 26 | 13 | 17 | ||||||||||||||
Net income | $1,774 | $1,344 | $1,958 | $647 | $189 | ||||||||||||||
Net income/(loss) available to common shareholders | $1,722 | $1,297 | $1,931 | $495 | ($87 | ) | |||||||||||||
Adjusted net income/(loss) available to common shareholders 2 | $1,729 | $1,476 | $1,178 | $495 | ($87 | ) | |||||||||||||
Net interest income - FTE 2 | $4,982 | $4,980 | $5,225 | $5,179 | $4,970 | ||||||||||||||
Total revenue - FTE 2 | 8,305 | 8,194 | 10,598 | 8,600 | 8,699 | ||||||||||||||
Total revenue - FTE, excluding net securities (losses)/gains 2 | 8,320 | 8,192 | 8,624 | 8,483 | 8,508 | ||||||||||||||
Total adjusted revenue - FTE 2 | 8,200 | 8,257 | 9,123 | 8,600 | 8,699 | ||||||||||||||
Net income/(loss) per average common share: | |||||||||||||||||||
Diluted 3 | 3.23 | 2.41 | 3.59 | 0.94 | (0.18 | ) | |||||||||||||
Adjusted diluted 2, 3 | 3.24 | 2.74 | 2.19 | 0.94 | (0.18 | ) | |||||||||||||
Basic | 3.26 | 2.43 | 3.62 | 0.94 | (0.18 | ) | |||||||||||||
Dividends paid per average common share | 0.70 | 0.35 | 0.20 | 0.12 | 0.04 | ||||||||||||||
Book value per common share | 41.52 | 38.61 | 37.59 | 36.86 | 36.34 | ||||||||||||||
Tangible book value per common share 2 | 29.82 | 27.01 | 25.98 | 25.18 | 23.76 | ||||||||||||||
Market capitalization | 21,978 | 19,734 | 15,279 | 9,504 | 14,768 | ||||||||||||||
Market price: | |||||||||||||||||||
High | 43.06 | 36.99 | 30.79 | 33.14 | 31.92 | ||||||||||||||
Low | 33.97 | 26.93 | 18.07 | 15.79 | 20.16 | ||||||||||||||
Close | 41.90 | 36.81 | 28.35 | 17.70 | 29.51 | ||||||||||||||
Period End Balances: | |||||||||||||||||||
Total assets | $190,328 | $175,335 | $173,442 | $176,859 | $172,874 | ||||||||||||||
Earning assets | 168,678 | 156,856 | 151,223 | 154,696 | 148,473 | ||||||||||||||
Loans | 133,112 | 127,877 | 121,470 | 122,495 | 115,975 | ||||||||||||||
ALLL | 1,937 | 2,044 | 2,174 | 2,457 | 2,974 | ||||||||||||||
Consumer and commercial deposits | 139,234 | 127,735 | 130,180 | 125,611 | 120,025 | ||||||||||||||
Brokered time and foreign deposits | 1,333 | 2,024 | 2,136 | 2,311 | 3,019 | ||||||||||||||
Long-term debt | 13,022 | 10,700 | 9,357 | 10,908 | 13,648 | ||||||||||||||
Total shareholders’ equity | 23,005 | 21,422 | 20,985 | 20,066 | 23,130 | ||||||||||||||
Selected Average Balances: | |||||||||||||||||||
Total assets | $182,176 | $172,497 | $176,134 | $172,440 | $172,375 | ||||||||||||||
Earning assets | 162,189 | 153,728 | 153,479 | 147,802 | 147,187 | ||||||||||||||
Loans | 130,874 | 122,657 | 122,893 | 116,308 | 113,925 | ||||||||||||||
Consumer and commercial deposits | 132,012 | 127,076 | 126,249 | 122,672 | 117,129 | ||||||||||||||
Brokered time and foreign deposits | 1,730 | 2,065 | 2,255 | 2,386 | 2,916 | ||||||||||||||
Intangible assets including MSRs | 7,630 | 7,535 | 7,322 | 7,780 | 7,837 | ||||||||||||||
MSRs | 1,255 | 1,121 | 887 | 1,331 | 1,317 | ||||||||||||||
Preferred stock | 800 | 725 | 290 | 1,328 | 4,929 | ||||||||||||||
Total shareholders’ equity | 22,170 | 21,167 | 20,495 | 20,696 | 22,834 | ||||||||||||||
Average common shares - diluted | 533,391 | 539,093 | 538,061 | 527,618 | 498,744 | ||||||||||||||
Average common shares - basic | 527,500 | 534,283 | 534,149 | 523,995 | 495,361 | ||||||||||||||
Financial Ratios: | |||||||||||||||||||
Effective tax rate 1, 4 | 22 | % | 19 | % | 29 | % | 16 | % | NM | ||||||||||
ROA | 0.97 | 0.78 | 1.11 | 0.38 | 0.11 | ||||||||||||||
ROE | 8.06 | 6.34 | 9.56 | 2.56 | (0.49 | ) | |||||||||||||
ROTCE 2 | 11.33 | 9.25 | 14.02 | 3.83 | (0.76 | ) | |||||||||||||
Net interest margin - FTE 2 | 3.07 | 3.24 | 3.40 | 3.50 | 3.38 | ||||||||||||||
Efficiency ratio 1 | 66.74 | 71.16 | 59.29 | 72.02 | 67.44 | ||||||||||||||
Tangible efficiency ratio 1, 2 | 66.44 | 70.89 | 58.86 | 71.52 | 66.85 | ||||||||||||||
Adjusted tangible efficiency ratio 1, 2 | 63.34 | 65.27 | 66.91 | 71.52 | 66.85 | ||||||||||||||
Total average shareholders’ equity to total average assets | 12.17 | 12.27 | 11.64 | 12.00 | 13.25 | ||||||||||||||
Tangible equity to tangible assets 2 | 9.17 | 9.00 | 8.82 | 8.10 | 10.12 | ||||||||||||||
ALLL to period-end loans | 1.46 | 1.60 | 1.80 | 2.01 | 2.58 | ||||||||||||||
NPAs to period-end loans, OREO, other repossessed assets, and nonperforming LHFS | 0.59 | 0.91 | 1.52 | 2.76 | 4.08 | ||||||||||||||
Common dividend payout ratio 5 | 21.5 | 14.5 | 5.6 | 12.9 | N/A | ||||||||||||||
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Capital Ratios at Period End (Basel I): | |||||||||||||||||||
Tier 1 common equity | 9.60 | % | 9.82 | % | 10.04 | % | 9.22 | % | 8.08 | % | |||||||||
Tier 1 capital | 10.80 | 10.81 | 11.13 | 10.90 | 13.67 | ||||||||||||||
Total capital | 12.51 | 12.81 | 13.48 | 13.67 | 16.54 | ||||||||||||||
Tier 1 leverage | 9.64 | 9.58 | 8.91 | 8.75 | 10.94 | ||||||||||||||
1 Amortization expense related to qualified affordable housing investment costs is recognized in provision for income taxes for the year ended December 31, 2014, as allowed by an accounting standard adopted in 2014. For periods prior to 2014, these amounts were previously recognized in other noninterest expense and have been reclassified for comparability as presented. See Table 34 in the MD&A for additional information.
2 See Table 34 in the MD&A for a reconcilement of Non-U.S. GAAP measures and additional information.
3 For EPS calculation purposes, the impact of dilutive securities are excluded from the diluted share count during periods in which we recognize a net loss available to common shareholders because the impact would be antidilutive.
4 The calculated effective tax rate for the year ended December 31, 2010, which was negative, was considered to be not meaningful ("NM").
5 The common dividend payout ratio is not applicable ("N/A") in a period of net loss.
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Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||
Important Cautionary Statement About Forward-Looking Statements
This report contains forward-looking statements. Statements regarding: (1) future levels of net interest margin; swap income; asset sensitivity; core expenses; cyclical costs; interest rates; commercial loan swap income; NPLs; provision for loan losses; the ALLL and the ratio of ALLL to total loans; net charge-offs, including net charge-offs in the residential, commercial, and consumer portfolios; and early stage delinquencies; (2) future actions taken regarding the LCR and related effects, and our ability to comply with future regulatory requirements within regulatory timelines; (3) expected share repurchases; (4) future changes in cyclical costs and our expense base, and efficiency goals; (5) the impact of Dodd-Frank Act, Basel III regulatory capital rules, and other regulatory standards on our capital ratios; and (6) our ability to utilize state and federal DTAs; 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 “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “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. Such statements 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" of this report and include risks discussed in this MD&A and in other periodic reports that we file with the SEC. Additional factors include: as one of the largest lenders in the Southeast and Mid-Atlantic U.S. and a provider of financial products and services to consumers and businesses across the U.S., our financial results have been, and may continue to be, materially affected by general economic conditions. 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; legislation and regulation, including the Dodd-Frank Act, as well as future legislation and/or regulation, could require us to change certain of our business practices, reduce our revenue, impose additional costs on us, or otherwise adversely affect our business operations and/or competitive position; we are subject to capital adequacy and liquidity guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected; loss of customer deposits and market illiquidity could increase our funding costs; we rely on the mortgage secondary market and GSEs for some of our liquidity; our framework for managing risks may not be effective in mitigating risk and loss to us; we
are subject to credit risk; our ALLL may not be adequate to cover our eventual losses; 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; a downgrade in the U.S. government's sovereign credit rating, or in the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in risks to us and general economic conditions that we are not able to predict; 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, borrower fraud, or certain breaches of our servicing agreements, and this could harm our liquidity, results of operations, and financial condition; we face certain risks as a servicer of loans; we are subject to risks related to delays in the foreclosure process; our earnings may be affected by volatility in mortgage production and servicing revenues, and by changes in carrying values of our MSRs and mortgages held for sale due to changes in interest rates; changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital and liquidity; disruptions in our ability to access global capital markets may adversely affect our capital resources and liquidity; the fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings; clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding; consumers 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 rely on other companies to provide key components of our business infrastructure; we are at risk of increased losses from fraud; a failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses; the soundness of other financial institutions could adversely affect us; we depend on the accuracy and completeness of information about clients and counterparties; competition in the financial services industry is intense and could result in losing business or margin declines; maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services; we might not pay dividends on our common stock; our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends; any reduction in our credit rating could increase the cost of our funding from the capital markets; 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 are subject to certain litigation, and our expenses related to this litigation may adversely affect our results; we may incur fines, penalties and
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other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations; we depend on the expertise of key personnel. 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 accounting policies and processes are critical to how we report our financial condition and results of operations. They require management to make estimates about matters that are uncertain; changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition; our stock price can be volatile; our disclosure controls and procedures may not prevent or detect all errors or acts of fraud; our financial instruments carried at fair value expose us to certain market risks; our revenues derived from our investment securities may be volatile and subject to a variety of risks; and we may enter into transactions with off-balance sheet affiliates or our subsidiaries.
INTRODUCTION
We are a leading provider of financial services, particularly in the Southeastern and Mid-Atlantic U.S., and our headquarters is located in Atlanta, Georgia. Our principal banking subsidiary, SunTrust Bank, offers a full line of financial services for consumers, businesses, corporations, and institutions, both through its branches (located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia) and through other national delivery channels. We operate three business segments: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking, with the remainder in Corporate Other. Within each of our businesses, we have growth strategies both within our Southeastern and Mid-Atlantic footprint and targeted national markets. See Note 20, "Business Segment Reporting," to the Consolidated Financial Statements in this Form 10-K for a description of our business segments. In addition to deposit, credit, mortgage banking, and trust and investment services offered by the Bank, our other subsidiaries provide asset and wealth management, securities brokerage, and capital markets services.
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. When we refer to “SunTrust,” “the Company,” “we,” “our,” and “us” in this narrative, we mean SunTrust Banks, Inc. and subsidiaries (consolidated). In the MD&A, net interest income, net interest margin, total revenue, and efficiency ratios are presented on an FTE basis. The FTE basis adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. Additionally, we present other non-U.S. GAAP metrics to assist investors in understanding
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 34.
EXECUTIVE OVERVIEW
Economic
The economy grew modestly in 2014, with gains in consumer spending, business investment, and employment. The unemployment rate finished the year at 5.6%. Fixed income and equity markets fluctuated significantly in the fourth quarter, with the S&P 500 volatility index peaking at levels not seen since 2012. Current economic conditions are likely to keep financial market volatility at elevated levels.
Corporate profits grew modestly in 2014, aided by a slight increase in revenue and a continuation of operational rightsizing. The real national Gross Domestic Product grew at a rate of 2.4% during 2014, compared to 2.2% during 2013. Consumer confidence increased during the year, propelled by a more favorable assessment of current economic and labor market conditions. The concern regarding the persistently low rate of inflation in the U.S. increased when U.S. crude oil and natural gas supplies flooded global markets, while weakening Asian and European economies dampened demand. Overall, the U.S. macroeconomic environment outlook suggests continued steady growth in 2015 as a more neutral fiscal policy stance and low energy prices boost consumer spending, in spite of wage stagnation.
The Federal Reserve continued to maintain a highly accommodative monetary policy and indicated that this policy would remain in effect for a considerable time after the completion of its asset purchase program. In this regard, the Federal Reserve concluded its asset purchase program in October 2014. The further reduction of its asset purchases was in response to improving labor market and other economic indicators. The Federal Reserve noted that its sizable holdings of longer-term government securities should maintain downward pressure on longer-term interest rates, thereby supporting housing markets and fostering accommodative financial conditions. During 2014, the yield curve flattened considerably as expectations for future inflation and global expansion moderated. The Federal Reserve continues to forecast economic growth strengthening from current levels with appropriate policy accommodation, a gradual decline in unemployment, and the expectation of gradually increasing inflation over the longer-term. The market expectation is for the Federal Reserve to begin tightening its monetary policy at a measured pace during the second half of 2015 and for the yield curve to remain flat as future inflation expectation is contained by low commodity prices and global economic weakness. The precise timing of the Federal Reserve beginning to tighten its monetary policy remains uncertain.
Financial Performance
We demonstrated improved financial performance in 2014 by generating solid earnings growth, growing loans and deposits, and maintaining expense discipline. We also experienced a significant improvement in asset quality during the year, which
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helped to offset the negative impact of the sustained low rate environment on revenues. These favorable developments helped enable us to double the capital return for our shareholders by increasing our dividend and buying back more shares. Separately, we addressed several outstanding legacy mortgage-related matters, including a fourth quarter legal provision to increase legal reserves and complete the resolution of a specific matter.
Our net income available to common shareholders totaled $1.7 billion for 2014, an increase of 33% compared to 2013, with diluted earnings per average common share of $3.23, up 34% from the prior year. Our core earnings growth during 2014 reflected our focus on expanding client relationships and executing our core strategies. Coming into 2014, we faced several meaningful revenue headwinds, namely the end of elevated mortgage refinance activity and the ongoing impact of the prolonged low rate environment on net interest margin. However, we remained focused on the commitments that we made to our stakeholders, and we delivered on those goals.
Noteworthy 2014 items included:
• | We delivered 33% earnings growth; |
• | Noninterest expense decreased $288 million compared to the prior year; |
• | We delivered on our announced 2014 efficiency ratio commitment, with an adjusted tangible efficiency ratio below 64%; |
• | Average total loans increased 7% compared to the prior year, driven by growth in C&I, CRE, and consumer loans; |
• | Average consumer and commercial deposits increased 4% compared to the prior year, with the favorable mix shift toward lower-cost deposits continuing; |
• | We maintained strong capital ratios that continue to be well above regulatory requirements, with our Basel I Tier 1 common and estimated, fully phased-in Basel III CET 1 ratios at 9.60% and 9.69%, respectively; |
• | We repurchased $458 million of common shares and issued $500 million of preferred stock; |
• | Tangible book value per share was $29.82, up 10% from the prior year; |
• | Asset quality continued to improve as NPLs declined 35% from the prior year and totaled 0.48% of total loans; |
• | Net charge-offs were down $233 million, or 34%, compared to 2013, representing 0.34% of average loans, down 21 basis points from the prior year; |
• | Our LCR is already above the January 1, 2016 requirement of 90%; |
• | We resolved many legacy mortgage-related issues; and |
• | Our ROA and ROTCE improved by 19 and 208 basis points compared to the prior year, to 0.97% and 11.33%, respectively. |
Our 2014 and 2013 results included several matters of a non-core nature that were separately disclosed in Forms 8-K. A summary of the Form 8-K and other legacy mortgage-related items that impacted our current and prior years' results are presented in Table 1. When excluding these items from each year's results, our diluted earnings per common share increased 18% during 2014, compared to 2013. Refer to Table 34, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for additional detail and the resulting
impacts of Form 8-K and other legacy mortgage-related items on our financial results.
Table 1 | |||||||
Year Ended December 31 | |||||||
(Dollars in millions, except per share amounts) | 2014 | 2013 | |||||
Net income available to common shareholders | $1,722 | $1,297 | |||||
Form 8-K and other legacy mortgage-related items impacting the periods: | |||||||
Charges for legacy mortgage-related matters | 324 | 482 | |||||
Gain on sale of RidgeWorth | (105 | ) | — | ||||
Tax benefit related to above items | (82 | ) | (190 | ) | |||
Tax benefit related to completion of tax authority examination | (130 | ) | — | ||||
Net tax benefit related to subsidiary reorganization and other | — | (113 | ) | ||||
Adjusted net income available to common shareholders | $1,729 | $1,476 | |||||
Net income per average common share, diluted | $3.23 | $2.41 | |||||
Adjusted net income per average common share, diluted | $3.24 | $2.74 | |||||
Total revenue increased $111 million during 2014 compared to the prior year. Total adjusted revenue decreased $57 million during the year, compared to 2013. The slight decrease was primarily driven by foregone RidgeWorth revenue and significantly lower mortgage production income resulting from a 45% decline in production volume due to lower refinance activity. Largely offsetting these reductions were higher investment banking, mortgage servicing, and retail investment services income, as well as gains on the sale of mortgage LHFS. Net interest income for 2014 was relatively flat compared to 2013, as strong loan growth offset a 17 basis point decline in net interest margin. Looking forward, we expect net interest margin in the first quarter of 2015 to decline from the fourth quarter 2014 level, driven primarily by lower commercial loan swap income. We will continue to carefully manage the usage and sensitivity of our balance sheet in light of the continued low interest rate environment, while also being cognizant of controlling interest rate risk in advance of what we expect will eventually be higher interest rates. 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 25, "Net Interest Income Asset Sensitivity," for an analysis of potential changes in net interest income due to instantaneous moves in benchmark interest rates, as well as Table 34, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures," for reconciliations of adjusted diluted net income per average common share and total adjusted revenue.
We met our commitment to reduce our expense base from 2013, as noninterest expense decreased $288 million, or 5%, and adjusted noninterest expense decreased $193 million, or 4%, compared to the prior year. These reductions reflect a combination of our efficiency efforts, lower cyclical costs, and the sale of RidgeWorth, partially offset by higher incentive compensation due to improved business performance in 2014, as well as our investments in key growth areas. As we look to 2015, we do not expect core expenses to decline from the 2014
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level; however, we will have to maintain strong expense discipline in what will continue to be a challenging revenue environment. See additional discussion related to noninterest expense in the "Noninterest Expense" section of this MD&A. Also see Table 34, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for a reconciliation of adjusted noninterest expense.
During 2014, our efficiency ratio improved to 66.7% from 71.2% in 2013. Our tangible efficiency and adjusted tangible efficiency ratios also improved during 2014 to 66.4% and 63.3%, compared to 70.9% and 65.3% in the prior year, respectively, despite the significant headwinds from lower mortgage volumes and declining net interest margin. We achieved our adjusted tangible efficiency ratio target of less than 64% for 2014, and for 2015, our goal is for our tangible efficiency ratio to be slightly below 63%. Further progress in 2015 will be much more challenging than 2014 for the following reasons: (1) we are expecting commercial loan swap income to decline by $185 million, which represents an approximate 150-basis-point headwind to our efficiency ratio; (2) our core expenses have declined significantly over the past few years and we do not anticipate further declines; and (3) having achieved a better than projected result in 2014, we are starting from a lower base. Irrespective of the short-term trajectory, we remain firmly committed to delivering further efficiency improvement in 2015, even if modest, to stay on track to achieve our primary long-term target of below 60%. See Table 34, "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.
Our asset quality exhibited meaningful improvement during 2014. Total NPLs declined 35% compared to December 31, 2013, primarily reflecting reductions in our residential loan portfolio. This significant reduction in the NPL portfolio was achieved in conjunction with the net charge-off ratio declining 21 basis points to 0.34% during 2014, with both measures reaching new multi-year lows. Over the near term, we expect further, though moderating, declines in NPLs, primarily in the residential portfolio. Reductions in OREO also continued, declining 42% from 2013 to $99 million, the lowest level since 2006. Early stage delinquencies, a leading indicator of asset quality, particularly for consumer loans, improved during the year, both in total and when excluding government-guaranteed loan delinquencies. While improving economic conditions have played a role in our strong asset quality performance, it is also the result of significant actions we have taken over the past several years to de-risk our balance sheet and improve the quality of our production.
At December 31, 2014, the ALLL balance equaled 1.46% of total loans, a decline of 14 basis points compared to December 31, 2013. The provision for loan losses decreased $210 million, or 38%, compared to 2013. The decline in the provision for loan losses was largely attributable to improvements in credit quality trends, particularly in our residential and CRE portfolios, and lower net charge-offs during the year. Assuming that the loan loss provision remains relatively stable to down slightly and loan growth continues, we expect the ALLL to period-end loans ratio to gradually trend down. See additional discussion of credit and asset quality in the “Loans,”
“Allowance for Credit Losses,” and “Nonperforming Assets,” sections of this MD&A.
During 2014, our average loans increased $8.2 billion, or 7%, compared to the prior year, driven by our C&I, CRE, and consumer portfolios, partially offset by strategic declines in our government-guaranteed residential mortgage portfolio. Period-end loans increased at a lower rate of 4%, or $5.2 billion, compared to the prior year, as we completed approximately $4 billion of loan sales in 2014. Our solid loan production performance reflects our execution of certain growth initiatives along with generally improving economic conditions in our markets. We have built positive and broad-based momentum across our lending platforms and are focused on ensuring our deposit growth is supportive of our lending initiatives. See additional loan discussion in the “Loans,” “Nonperforming Assets,” and "Net Interest Income/Margin" sections of this MD&A.
Average consumer and commercial deposits increased 4% during 2014, driven by improved and broad-based growth in lower cost deposits across all of our business segments, partially offset by declines in time deposits due to maturities. Additionally, rates paid on these deposits declined five basis points compared to the prior year. See additional discussion on our deposits in the "Net Interest Income/Margin" and "Deposits" sections of this MD&A.
Capital and Liquidity
During 2014, we repurchased approximately $458 million of our outstanding common stock, which included $328 million under our 2013 and 2014 capital plans, as well as $130 million after recognition of a tax benefit related to the completion of a tax authority examination. Additionally, thus far during the first quarter of 2015, we repurchased $50 million of our outstanding common stock at market value and we expect to repurchase between $60 million and $70 million of additional outstanding common stock through the end of the first quarter of 2015, which would complete our share repurchases under our 2014 capital plan. We have submitted our 2015 capital plan in conjunction with the 2015 CCAR cycle.
Our book value and tangible book value per share increased 8% and 10%, respectively, compared to the prior year due primarily to growth in retained earnings. Additionally, we increased our quarterly common stock dividend by $0.10 per common share effective in the second quarter of 2014, which resulted in dividends for 2014 of $0.70 per common share, an increase from $0.35 per common share in 2013. See additional details related to our capital actions in the “Capital Resources” section of this MD&A.
The Federal Reserve's final rules related to capital adequacy requirements to implement the BCBS's Basel III framework for financial institutions in the U.S. became effective for us on January 1, 2015. Based on our analysis of the requirements, we estimate our Basel III CET 1 ratio at December 31, 2014, on a fully phased-in basis, to be approximately 9.69%, which is well above the regulatory requirement prescribed by the final rules. See Table 34, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures" in this MD&A for a reconciliation of the current Basel I ratio to the estimated Basel III ratio. In November 2014, we issued $500 million of perpetual preferred
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stock as part of a longer-term process to optimize the mix between common and non-common Tier 1 capital.
Separately, our LCR at December 31, 2014 exceeds the January 1, 2016, 90% requirement. The cumulative actions we have taken to improve our risk and earnings profile, combined with our strong capital and liquidity levels, should help us to further increase capital returns to shareholders. See additional discussion of our capital and liquidity position in the "Capital Resources" and "Liquidity Risk Management" sections of this MD&A.
Business Segments Highlights
Consumer Banking and Private Wealth Management
Consumer Banking and Private Wealth Management net income was up 7% compared to 2013, driven by higher revenue and a lower provision for credit losses, partially offset by higher expenses. Total revenue increased 2% compared to 2013, driven primarily by growth in wealth management-related fees. This reflects our increased investments in people, tools, and technology to drive higher revenue growth across our affluent and high net worth client segments. These investments were also the primary drivers of the growth in expenses compared to 2013. We believe our results in this business demonstrate good execution of the core strategic initiatives we have outlined in the past, which include improving wealth-management related income, enhancing the growth and returns of our consumer lending portfolio, and making critical investments in talent and technology. For 2015, we are focused on continuing our core revenue momentum; however, expense discipline will also remain important, as we continue to balance cost reduction opportunities with selective investments for growth.
Wholesale Banking
Wholesale Banking remains a key growth engine for us, and we gained momentum in that business in 2014. For the year, average client deposits increased 10% and capital markets-related fees were up 9%. Net income also increased compared to 2013, driven
by solid revenue growth and a lower provision for credit losses. Fees were up modestly, as lower trading and leasing income, combined with the exit of a legacy affordable housing partnership, were more than offset by double-digit growth in investment banking income. Our investment banking performance in 2014 reflects broad-based growth, with record or near-record results across debt and equity capital markets, as well as in mergers and acquisitions advisory services. The success of our platform reflects our continued investment in talent to expand and diversify our capabilities. We are confident that Wholesale Banking is poised for further growth in 2015.
Mortgage Banking
Over the past year, our core Mortgage business demonstrated steady improvement. This progress was driven by our efforts to normalize our cost base and improve our risk profile. Through these efforts, we are now able to more firmly focus on the core strategies in place to meet more client needs, drive higher revenue, and deliver incremental efficiency improvement. Mortgage Banking's core profitability for full year 2014 was driven primarily by a 30% reduction in noninterest expense compared to the prior year. Our 2014 efficiency ratio improved significantly from 2013 to 102%, and excluding the $324 million of Form 8-K and other legacy mortgage-related items presented in Table 1 and Table 34, the efficiency ratio declined to below 75% for 2014. Revenue declined modestly, as growth in net interest income was more than offset by a decline in fee income. Core mortgage production income declined approximately 50% compared to the prior year; however, mortgage servicing income more than doubled, driven mainly by lower prepayments in the servicing portfolio and increased service fees resulting from servicing portfolio acquisitions in 2014.
Additional information related to our segments can be found in Note 20, "Business Segment Reporting," to the Consolidated Financial Statements in this Form 10-K, and further discussion of segment results for 2014 and 2013 can be found in the
"Business Segment Results" section of this MD&A.
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Consolidated Daily Average Balances, Income/Expense, and Average Yields Earned/Rates Paid | Table 2 | |||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
(Dollars in millions; yields on taxable-equivalent basis) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Loans: 1 | ||||||||||||||||||||||||||||||||
C&I - FTE 2 | $61,181 | $2,184 | 3.57 | % | $54,788 | $2,181 | 3.98 | % | $51,228 | $2,329 | 4.55 | % | ||||||||||||||||||||
CRE | 6,150 | 177 | 2.88 | 4,513 | 146 | 3.24 | 4,517 | 165 | 3.65 | |||||||||||||||||||||||
Commercial construction | 1,078 | 35 | 3.28 | 701 | 24 | 3.46 | 816 | 31 | 3.79 | |||||||||||||||||||||||
Residential mortgages - guaranteed | 1,890 | 70 | 3.68 | 3,708 | 106 | 2.85 | 5,589 | 165 | 2.96 | |||||||||||||||||||||||
Residential mortgages - nonguaranteed | 23,691 | 944 | 3.99 | 23,007 | 958 | 4.17 | 22,621 | 1,023 | 4.52 | |||||||||||||||||||||||
Home equity products | 14,329 | 512 | 3.57 | 14,474 | 525 | 3.63 | 14,962 | 551 | 3.68 | |||||||||||||||||||||||
Residential construction | 457 | 21 | 4.64 | 549 | 27 | 4.91 | 692 | 36 | 5.17 | |||||||||||||||||||||||
Guaranteed student loans | 5,375 | 197 | 3.66 | 5,426 | 207 | 3.82 | 6,863 | 265 | 3.87 | |||||||||||||||||||||||
Other consumer direct | 3,635 | 153 | 4.22 | 2,535 | 111 | 4.37 | 2,226 | 97 | 4.34 | |||||||||||||||||||||||
Indirect | 11,459 | 366 | 3.19 | 11,072 | 377 | 3.41 | 10,468 | 403 | 3.85 | |||||||||||||||||||||||
Credit cards | 772 | 75 | 9.64 | 646 | 62 | 9.66 | 567 | 57 | 10.06 | |||||||||||||||||||||||
Nonaccrual 3 | 857 | 22 | 2.59 | 1,238 | 33 | 2.63 | 2,344 | 31 | 1.32 | |||||||||||||||||||||||
Total loans - FTE | 130,874 | 4,756 | 3.63 | 122,657 | 4,757 | 3.88 | 122,893 | 5,153 | 4.19 | |||||||||||||||||||||||
Securities AFS: | ||||||||||||||||||||||||||||||||
Taxable | 23,779 | 603 | 2.54 | 22,383 | 569 | 2.54 | 21,875 | 640 | 2.93 | |||||||||||||||||||||||
Tax-exempt - FTE 2 | 245 | 13 | 5.26 | 258 | 13 | 5.18 | 368 | 20 | 5.33 | |||||||||||||||||||||||
Total securities AFS - FTE | 24,024 | 616 | 2.56 | 22,641 | 582 | 2.57 | 22,243 | 660 | 2.97 | |||||||||||||||||||||||
Fed funds sold and securities borrowed or purchased under agreements to resell | 1,067 | — | — | 1,024 | — | 0.02 | 897 | — | 0.04 | |||||||||||||||||||||||
LHFS | 2,085 | 78 | 3.75 | 3,096 | 107 | 3.44 | 3,267 | 112 | 3.41 | |||||||||||||||||||||||
Interest-bearing deposits | 31 | — | 0.08 | 21 | — | 0.09 | 22 | — | 0.21 | |||||||||||||||||||||||
Interest earning trading assets | 4,108 | 76 | 1.86 | 4,289 | 69 | 1.61 | 4,157 | 65 | 1.55 | |||||||||||||||||||||||
Total earning assets | 162,189 | 5,526 | 3.41 | 153,728 | 5,515 | 3.59 | 153,479 | 5,990 | 3.90 | |||||||||||||||||||||||
ALLL | (1,995 | ) | (2,121 | ) | (2,295 | ) | ||||||||||||||||||||||||||
Cash and due from banks | 5,773 | 4,530 | 5,482 | |||||||||||||||||||||||||||||
Other assets | 14,674 | 14,287 | 14,854 | |||||||||||||||||||||||||||||
Noninterest earning trading assets and derivatives | 1,255 | 1,660 | 2,184 | |||||||||||||||||||||||||||||
Unrealized gains on securities available for sale, net | 280 | 413 | 2,430 | |||||||||||||||||||||||||||||
Total assets | $182,176 | $172,497 | $176,134 | |||||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||
NOW accounts | $28,879 | $22 | 0.08 | % | $26,083 | $17 | 0.07 | % | $22,155 | $23 | 0.09 | % | ||||||||||||||||||||
Money market accounts | 44,813 | 66 | 0.15 | 42,655 | 54 | 0.13 | 42,101 | 88 | 0.21 | |||||||||||||||||||||||
Savings | 6,076 | 2 | 0.04 | 5,740 | 3 | 0.05 | 5,113 | 5 | 0.10 | |||||||||||||||||||||||
Consumer time | 7,539 | 66 | 0.88 | 9,018 | 102 | 1.13 | 10,597 | 145 | 1.37 | |||||||||||||||||||||||
Other time | 4,294 | 46 | 1.06 | 4,937 | 64 | 1.29 | 5,954 | 91 | 1.52 | |||||||||||||||||||||||
Total interest-bearing consumer and commercial deposits | 91,601 | 202 | 0.22 | 88,433 | 240 | 0.27 | 88,920 | 352 | 0.40 | |||||||||||||||||||||||
Brokered time deposits | 1,584 | 33 | 2.08 | 2,030 | 51 | 2.49 | 2,204 | 77 | 3.42 | |||||||||||||||||||||||
Foreign deposits | 146 | — | 0.12 | 35 | — | 0.13 | 51 | — | 0.17 | |||||||||||||||||||||||
Total interest-bearing deposits | 93,331 | 235 | 0.25 | 90,498 | 291 | 0.32 | 91,175 | 429 | 0.47 | |||||||||||||||||||||||
Funds purchased | 931 | 1 | 0.09 | 639 | 1 | 0.10 | 798 | 1 | 0.11 | |||||||||||||||||||||||
Securities sold under agreements to repurchase | 2,202 | 3 | 0.14 | 1,857 | 3 | 0.14 | 1,602 | 3 | 0.18 | |||||||||||||||||||||||
Interest-bearing trading liabilities | 806 | 21 | 2.65 | 705 | 17 | 2.45 | 676 | 15 | 2.24 | |||||||||||||||||||||||
Other short-term borrowings | 6,135 | 14 | 0.23 | 4,953 | 13 | 0.26 | 6,952 | 18 | 0.27 | |||||||||||||||||||||||
Long-term debt | 12,359 | |||||||||||||||||||||||||||||||