Exhibit 99.1
INDEX TO SUNTRUST BANKS, INC. FINANCIAL STATEMENTS (UNAUDITED)
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Consolidated Statements of Income | 2 | |||
Consolidated Statements of Comprehensive Income | 3 | |||
Consolidated Balance Sheets | 4 | |||
Consolidated Statements of Shareholders’ Equity | 5 | |||
Consolidated Statements of Cash Flows | 6 | |||
Notes to Consolidated Financial Statements (Unaudited) | 7 |
SunTrust Banks, Inc.
Consolidated Statements of Income
Three Months Ended March 31 | ||||||||
(Dollars in millions and shares in thousands, except per share data) (Unaudited) | 2019 | 2018 | ||||||
Interest Income | ||||||||
Interest and fees on loans held for investment | $1,697 | $1,398 | ||||||
Interest and fees on loans held for sale | 13 | 21 | ||||||
Interest on securities available for sale | 221 | 206 | ||||||
Trading account interest and other | 56 | 43 | ||||||
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Total interest income | 1,987 | 1,668 | ||||||
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Interest Expense | ||||||||
Interest on deposits | 249 | 131 | ||||||
Interest on long-term debt | 125 | 74 | ||||||
Interest on other borrowings | 69 | 22 | ||||||
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Total interest expense | 443 | 227 | ||||||
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Net interest income | 1,544 | 1,441 | ||||||
Provision for credit losses | 153 | 28 | ||||||
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Net interest income after provision for credit losses | 1,391 | 1,413 | ||||||
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Noninterest Income | ||||||||
Service charges on deposit accounts | 137 | 146 | ||||||
Other charges and fees1 | 87 | 85 | ||||||
Card fees | 82 | 81 | ||||||
Investment banking income1 | 130 | 133 | ||||||
Trading income | 60 | 42 | ||||||
Mortgage related income2 | 100 | 90 | ||||||
Trust and investment management income | 71 | 75 | ||||||
Retail investment services | 69 | 72 | ||||||
Commercial real estate related income | 24 | 23 | ||||||
Net securities gains/(losses) | — | 1 | ||||||
Other noninterest income | 24 | 48 | ||||||
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Total noninterest income | 784 | 796 | ||||||
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Noninterest Expense | ||||||||
Employee compensation | 676 | 707 | ||||||
Employee benefits | 148 | 146 | ||||||
Outside processing and software | 238 | 206 | ||||||
Net occupancy expense | 102 | 94 | ||||||
Merger-related costs | 45 | — | ||||||
Equipment expense | 42 | 40 | ||||||
Marketing and customer development | 41 | 41 | ||||||
Operating losses | 22 | 6 | ||||||
Regulatory assessments | 19 | 41 | ||||||
Amortization | 15 | 15 | ||||||
Other noninterest expense | 141 | 121 | ||||||
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Total noninterest expense | 1,489 | 1,417 | ||||||
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Income before provision for income taxes | 686 | 792 | ||||||
Provision for income taxes | 104 | 147 | ||||||
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Net income including income attributable to noncontrolling interest | 582 | 645 | ||||||
Less: Net income attributable to noncontrolling interest | 2 | 2 | ||||||
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Net income | 580 | 643 | ||||||
Less: Preferred stock dividends | 26 | 31 | ||||||
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Net income available to common shareholders | $554 | $612 | ||||||
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Net income per average common share: | ||||||||
Diluted | $1.24 | $1.29 | ||||||
Basic | 1.25 | 1.31 | ||||||
Dividends declared per common share | 0.50 | 0.40 | ||||||
Average common shares outstanding - diluted | 446,662 | 473,620 | ||||||
Average common shares outstanding - basic | 443,566 | 468,723 |
1 | Beginning July 1, 2018, the Company began presenting bridge commitment fee income related to capital market transactions in Investment banking income on the Consolidated Statements of Income. For periods prior to July 1, 2018, this income was previously presented in Other charges and fees and has been reclassified to Investment banking income for comparability. |
2 | Beginning with the 2018 Form10-K, the Company began presenting Mortgage production related income and Mortgage servicing related income as a single line item on the Consolidated Statements of Income titled Mortgage related income. Prior periods have been conformed to this updated presentation for comparability. |
See accompanying Notes to Consolidated Financial Statements (unaudited).
2
SunTrust Banks, Inc.
Consolidated Statements of Comprehensive Income
Three Months Ended March 31 | ||||||||
(Dollars in millions) (Unaudited) | 2019 | 2018 | ||||||
Net income | $580 | $643 | ||||||
Components of other comprehensive income/(loss): | ||||||||
Change in net unrealized gains/(losses) on securities available for sale, net of tax of $116 and ($130), respectively | 377 | (425 | ) | |||||
Change in net unrealized gains/(losses) on derivative instruments, net of tax of $24 and ($38), respectively | 76 | (124 | ) | |||||
Change in net unrealized (losses)/gains on brokered time deposits, net of tax of $0 and $0, respectively | (1 | ) | 1 | |||||
Change in credit risk adjustment on long-term debt, net of tax of $0 and $1, respectively | (1 | ) | 2 | |||||
Change related to employee benefit plans, net of tax of $2 and $1, respectively | 3 | (2 | ) | |||||
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Total other comprehensive income/(loss), net of tax | 454 | (548 | ) | |||||
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Total comprehensive income | $1,034 | $95 | ||||||
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See accompanying Notes to Consolidated Financial Statements (unaudited).
3
SunTrust Banks, Inc.
Consolidated Balance Sheets
(Dollars in millions and shares in thousands, except per share data) | March 31, 2019 | December 31, 2018 | ||||||
Assets | (Unaudited) | |||||||
Cash and due from banks | $4,521 | $5,791 | ||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 1,386 | 1,679 | ||||||
Interest-bearing deposits in other banks | 25 | 25 | ||||||
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Cash and cash equivalents | 5,932 | 7,495 | ||||||
Trading assets and derivative instruments1 | 6,259 | 5,506 | ||||||
Securities available for sale2 | 31,853 | 31,442 | ||||||
Loans held for sale ($1,059 and $1,178 at fair value at March 31, 2019 and December 31, 2018, respectively) | 1,781 | 1,468 | ||||||
Loans held for investment3 ($134 and $163 at fair value at March 31, 2019 and December 31, 2018, respectively) | 155,233 | 151,839 | ||||||
Allowance for loan and lease losses | (1,643 | ) | (1,615 | ) | ||||
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Net loans held for investment | 153,590 | 150,224 | ||||||
Premises, property, and equipment, net | 1,997 | 2,024 | ||||||
Goodwill | 6,331 | 6,331 | ||||||
Other intangible assets (Residential MSRs at fair value: $1,883 and $1,983 at March 31, 2019 and December 31, 2018, respectively) | 1,963 | 2,062 | ||||||
Other assets ($85 and $95 at fair value at March 31, 2019 and December 31, 2018, respectively) | 10,719 | 8,991 | ||||||
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Total assets | $220,425 | $215,543 | ||||||
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Liabilities | ||||||||
Noninterest-bearing deposits | $40,345 | $40,770 | ||||||
Interest-bearing deposits ($473 and $403 at fair value at March 31, 2019 and December 31, 2018, respectively) | 121,807 | 121,819 | ||||||
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Total deposits | 162,152 | 162,589 | ||||||
Funds purchased | 1,169 | 2,141 | ||||||
Securities sold under agreements to repurchase | 1,962 | 1,774 | ||||||
Other short-term borrowings | 7,259 | 4,857 | ||||||
Long-term debt4 ($296 and $289 at fair value at March 31, 2019 and December 31, 2018, respectively) | 17,395 | 15,072 | ||||||
Trading liabilities and derivative instruments | 1,609 | 1,604 | ||||||
Other liabilities | 4,056 | 3,226 | ||||||
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Total liabilities | 195,602 | 191,263 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock, no par value | 2,025 | 2,025 | ||||||
Common stock, $1.00 par value | 553 | 553 | ||||||
Additionalpaid-in capital | 8,938 | 9,022 | ||||||
Retained earnings | 19,882 | 19,522 | ||||||
Treasury stock, at cost, and other5 | (5,609 | ) | (5,422 | ) | ||||
Accumulated other comprehensive loss, net of tax | (966 | ) | (1,420 | ) | ||||
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Total shareholders’ equity | 24,823 | 24,280 | ||||||
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Total liabilities and shareholders’ equity | $220,425 | $215,543 | ||||||
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Common shares outstanding6 | 443,713 | 446,888 | ||||||
Common shares authorized | 750,000 | 750,000 | ||||||
Preferred shares outstanding | 20 | 20 | ||||||
Preferred shares authorized | 50,000 | 50,000 | ||||||
Treasury shares of common stock | 109,071 | 105,896 | ||||||
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1 Includes trading securities pledged as collateral where counterparties have the right to sell or repledge the collateral | $1,382 | $1,442 | ||||||
2 Includes securities AFS pledged as collateral where counterparties have the right to sell or repledge the collateral | 210 | 222 | ||||||
3 Includes loans held for investment of consolidated VIEs | 147 | 153 | ||||||
4 Includes debt of consolidated VIEs | 156 | 161 | ||||||
5 Includes noncontrolling interest | 101 | 103 | ||||||
6 Includes restricted shares | 7 | 7 |
See accompanying Notes to Consolidated Financial Statements (unaudited).
4
SunTrust Banks, Inc.
Consolidated Statements of Shareholders’ Equity
(Dollars and shares in millions, except per share data) (Unaudited) | Preferred Stock | Common Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury 1 Stock and Other | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||
Balance, January 1, 2018 | $2,475 | 471 | $550 | $9,000 | $17,540 | ($3,591 | ) | ($820 | ) | $25,154 | ||||||||||||||||||||||
Cumulative effect of adjustment related to ASU adoptions 2 | — | — | — | — | 144 | — | (154 | ) | (10 | ) | ||||||||||||||||||||||
Net income | — | — | — | — | 643 | — | — | 643 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (548 | ) | (548 | ) | ||||||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||||||||
Common stock dividends, $0.40 per share | — | — | — | — | (187 | ) | — | — | (187 | ) | ||||||||||||||||||||||
Preferred stock dividends3 | — | — | — | — | (31 | ) | — | — | (31 | ) | ||||||||||||||||||||||
Redemption of preferred stock, Series E | (450 | ) | — | — | — | — | — | — | (450 | ) | ||||||||||||||||||||||
Repurchase of common stock | — | (5 | ) | — | — | — | (330 | ) | — | (330 | ) | |||||||||||||||||||||
Exercise of stock options and stock compensation expense | — | 1 | — | — | — | 32 | — | 32 | ||||||||||||||||||||||||
Exercise of stock warrants | — | 2 | 2 | — | — | — | — | 2 | ||||||||||||||||||||||||
Restricted stock activity | — | 1 | — | (40 | ) | (2 | ) | 38 | — | (4 | ) | |||||||||||||||||||||
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Balance, March 31, 2018 | $2,025 | 470 | $552 | $8,960 | $18,107 | ($3,853 | ) | ($1,522 | ) | $24,269 | ||||||||||||||||||||||
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Balance, January 1, 2019 | $2,025 | 447 | $553 | $9,022 | $19,522 | ($5,422 | ) | ($1,420 | ) | $24,280 | ||||||||||||||||||||||
Cumulative effect adjustment related to ASU adoption 4 | — | — | — | — | 31 | — | — | 31 | ||||||||||||||||||||||||
Net income | — | — | — | — | 580 | — | — | 580 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 454 | 454 | ||||||||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||||||||
Common stock dividends, $0.50 per share | — | — | — | — | (222 | ) | — | — | (222 | ) | ||||||||||||||||||||||
Preferred stock dividends3 | — | — | — | — | (26 | ) | — | — | (26 | ) | ||||||||||||||||||||||
Repurchase of common stock | — | (4 | ) | — | — | — | (250 | ) | — | (250 | ) | |||||||||||||||||||||
Exercise of stock options and stock compensation expense | — | — | — | (1 | ) | — | 3 | — | 2 | |||||||||||||||||||||||
Restricted stock activity | — | 1 | — | (83 | ) | (3 | ) | 62 | — | (24 | ) | |||||||||||||||||||||
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Balance, March 31, 2019 | $2,025 | 444 | $553 | $8,938 | $19,882 | ($5,609 | ) | ($966 | ) | $24,823 | ||||||||||||||||||||||
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1 | At March 31, 2019, includes ($5,710) million for treasury stock and $101 million for noncontrolling interest. |
At March 31, 2018, includes ($3,953) million for treasury stock, less than ($1) million for the compensation element of restricted stock, and $101 million for noncontrolling interest. |
2 | Related to the Company’s adoption of ASU2014-09, ASU2016-01, ASU2017-12, and ASU2018-02 on January 1, 2018. See Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K for additional information. |
3 | For the three months ended March 31, 2019, dividends were $1,000 per share for both Series A and B Preferred Stock, $1,406 per share for Series F Preferred Stock, $1,263 per share for Series G Preferred Stock, and $1,281 per share for Series H Preferred Stock. |
For the three months ended March 31, 2018, dividends were $1,000 per share for both Series A and B Preferred Stock, $1,469 per share for Series E Preferred Stock, $1,406 per share for Series F Preferred Stock, $1,038 per share for Series G Preferred Stock, and $1,281 per share for Series H Preferred Stock. |
4 | Related to the Company’s adoption of ASU2016-02 on January 1, 2019. See Note 1, “Significant Accounting Policies,” for additional information. |
See accompanying Notes to Consolidated Financial Statements (unaudited).
5
SunTrust Banks, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 31 | ||||||||
(Dollars in millions) (Unaudited) | 2019 | 2018 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net income including income attributable to noncontrolling interest | $582 | $645 | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation, amortization, and accretion | 172 | 175 | ||||||
Origination of servicing rights | (67 | ) | (80 | ) | ||||
Provisions for credit losses and foreclosed property | 156 | 30 | ||||||
Stock-based compensation | 37 | 56 | ||||||
Net securities (gains)/losses | — | (1 | ) | |||||
Net (gains)/losses on sale of loans held for sale, loans, and other assets | (46 | ) | 11 | |||||
Net increase in loans held for sale | (265 | ) | (100 | ) | ||||
Net increase in trading assets and derivative instruments | (753 | ) | (182 | ) | ||||
Net increase in other assets1 | (354 | ) | (644 | ) | ||||
Net decrease in other liabilities | (285 | ) | (110 | ) | ||||
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Net cash used in operating activities | (823 | ) | (200 | ) | ||||
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Cash Flows from Investing Activities: | ||||||||
Proceeds from maturities, calls, and paydowns of securities available for sale | 853 | 858 | ||||||
Proceeds from sales of securities available for sale | 111 | 1,663 | ||||||
Purchases of securities available for sale | (962 | ) | (2,689 | ) | ||||
Net (increase)/decrease in loans and leases, including purchases1 | (3,625 | ) | 413 | |||||
Proceeds from sales of loans and leases | 40 | 36 | ||||||
Net cash paid for servicing rights | (1 | ) | (60 | ) | ||||
Capital expenditures | (81 | ) | (67 | ) | ||||
Proceeds from the sale of other real estate owned and other assets | 29 | 52 | ||||||
Other investing activities | 8 | 3 | ||||||
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Net cash (used in)/provided by investing activities | (3,628 | ) | 209 | |||||
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Cash Flows from Financing Activities: | ||||||||
Net (decrease)/increase in total deposits | (437 | ) | 1,599 | |||||
Net increase/(decrease) in funds purchased, securities sold under agreements to repurchase, and other short-term borrowings | 1,618 | (1,209 | ) | |||||
Proceeds from issuance of long-term debt | 2,264 | 1,311 | ||||||
Repayments of long-term debt | (35 | ) | (333 | ) | ||||
Repurchase of preferred stock | — | (450 | ) | |||||
Repurchase of common stock | (250 | ) | (330 | ) | ||||
Common and preferred stock dividends paid | (225 | ) | (197 | ) | ||||
Taxes paid related to net share settlement of equity awards | (49 | ) | (42 | ) | ||||
Proceeds from exercise of stock options | 2 | 34 | ||||||
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Net cash provided by financing activities | 2,888 | 383 | ||||||
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Net (decrease)/increase in cash and cash equivalents | (1,563 | ) | 392 | |||||
Cash and cash equivalents at beginning of period | 7,495 | 6,912 | ||||||
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Cash and cash equivalents at end of period | $5,932 | $7,304 | ||||||
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Supplemental Disclosures: | ||||||||
Loans transferred from loans held for sale to loans held for investment | 4 | 6 | ||||||
Loans transferred from loans held for investment to loans held for sale | 614 | 204 | ||||||
Loans transferred from loans held for investment to other real estate owned | 10 | 19 |
1 | Pursuant to the Company’s adoption of ASU2016-02 on January 1, 2019, it began including the interest portion of lessee payments received from sales-type and direct financing leases, which totaled $34 million for the three months ended March 31, 2019, within operating activities, with the principal portion of lessee payments remaining within investing activities. For periods prior to January 1, 2019, interest payments were not retrospectively reclassified and remain within investing activities. See Note 1, “Significant Accounting Policies,” for additional information. |
See accompanying Notes to Consolidated Financial Statements (unaudited).
6
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The unaudited Consolidated Financial Statements included within this report have been prepared in accordance with U.S. GAAP to present interim financial statement information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete, consolidated financial statements. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of operations in these financial statements, have been made.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes; actual results could vary from these estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Interim Consolidated Financial Statements should be read in conjunction with the Company’s 2018 Annual Report on Form10-K.
Changes in Significant Accounting Policies
Pursuant to the Company’s adoption of ASC Topic 842 as of January 1, 2019, the Company updated its accounting policy related to leases. See Note 10, “Leases,” for new disclosures and policy information related to the Company’s leases. There were no other significant changes to the Company’s accounting policies from those disclosed in the Company’s 2018 Annual Report on Form10-K that could have a material effect on the Company’s financial statements.
Subsequent Events
The Company evaluated events that occurred between March 31, 2019 and the date the accompanying financial statements were issued, and there were no material events, other than those already discussed in this Form10-Q, that would require recognition in the Company’s Consolidated Financial Statements or disclosure in the accompanying Notes.
Accounting Pronouncements
The following table summarizes ASU s issued by the FASB that were adopted during the three months ended March 31, 2019 or not yet adopted as of March 31, 2019, that could have a material effect on the Company’s financial statements:
Standard | Description | Required Date of Adoption | Effect on the Financial Statements or Other Significant Matters | |||
Standards Adopted in 2019 | ||||||
ASU2016-02, Leases (Topic 842) and subsequent related ASUs | These ASUs create and amend ASC Topic 842,Leases, which supersedes ASC Topic 840,Leases. ASC Topic 842 requires lessees to recognizeright-of-use assets and associated liabilities that arise from leases, with the exception of short-term leases. These ASUs do not make significant changes to lessor accounting; however, there were certain improvements made to align lessor accounting with the lessee accounting model and ASC Topic 606,Revenue from Contracts with Customers. Furthermore, there are several new qualitative and quantitative disclosures required for lessees and lessors, including updated guidance around the presentation of certain cash receipts on the Company’s Consolidated Statements of Cash Flows.
Upon transition, lessees and lessors have the option to either:
(i) Recognize and measure leases at the beginning of the earliest period presented using a modified retrospective transition approach; or
(ii) Apply a modified retrospective transition approach as of the date of adoption. | January 1, 2019 | The Company adopted these ASUs on January 1, 2019, using a modified retrospective transition approach as of the date of adoption, which resulted in the recognition of $1.2 billion and $1.3 billion inright-of-use assets and associated lease liabilities, respectively, arising from operating leases in which the Company is the lessee, on the Company’s Consolidated Balance Sheets. The amount of theright-of-use assets and associated lease liabilities recorded upon adoption was based primarily on the present value of unpaid future minimum lease payments, the amount of which was based on the population of leases in effect at the date of adoption. At March 31, 2019, the Company’sright-of-use assets and lease liabilities recorded on its Consolidated Balance Sheets totaled $1.2 billion and $1.3 billion, respectively.
Upon adoption, the Company also recognized a cumulative effect adjustment of $31 million to increase the beginning balance of retained earnings (as of January 1, 2019) for deferred gains on sale-leaseback transactions that occurred prior to the date of adoption and for other transition provisions. These ASUs did not have a material impact on the timing of expense or income recognition in the Company’s Consolidated Statements of Income.
Furthermore, effective January 1, 2019, the Company prospectively changed its presentation of certain cash receipts related to sales-type and direct financing leases in which it is the lessor on its Consolidated Statements of Cash Flows. Specifically, the Company began including on its Consolidated Statements of Cash Flows the interest portion of lessee payments received from sales-type and direct financing leases within operating activities, with the principal portion remaining within investing activities. For periods prior to the date of adoption, interest payments were not retrospectively reclassified and remain within investing activities. For the three months ended March 31, 2019, the Company included $34 million of interest payments received related to these sales-type and direct financing leases within operating activities on its Consolidated Statements of Cash Flows.
For additional information and required disclosures related to ASC 842, see Note 10, “Leases.” | |||
7
Notes to Consolidated Financial Statements (Unaudited), continued
Standard | Description | Required Date of Adoption | Effect on the Financial Statements or Other Significant Matters | |||
Standards Not Yet Adopted | ||||||
ASU2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) and subsequent related ASUs | These ASUs create and amend ASC Topic 326,Financial Instruments - Credit Losses, which replaces the incurred loss impairment methodology with a current expected credit loss methodology for financial instruments measured at amortized cost and other commitments to extend credit. For this purpose, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of voluntary prepayments and considering available information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is deducted from the amortized cost basis of the financial assets to reflect the net amount expected to be collected on the financial assets. Additional quantitative and qualitative disclosures are required upon adoption. The change to the allowance for credit losses at the time of the adoption will be made with a cumulative effect adjustment to retained earnings.
Although the current expected credit loss methodology does not apply to AFS debt securities, the ASU does require entities to record an allowance when recognizing credit losses for AFS securities, rather than recording a direct write-down of the carrying amount.
| January 1, 2020
Early adoption is permitted beginning January 1, 2019. | The Company formed a cross-functional team to oversee the implementation of this ASU. A detailed implementation plan has been developed and substantial progress has been made on the identification and staging of data, development and validation of models, refinement of economic forecasting processes, and documentation of accounting policy decisions. Additionally, a new credit loss forecasting process is being implemented. In conjunction with this implementation, the Company is modifying the internal control environment, as appropriate. The Company plans to perform parallel runs of its new methodology beginning in the second quarter of 2019, prior to adoption of the ASU.
The Company plans to adopt these ASUs on January 1, 2020, and is evaluating the impact that these ASUs will have on its Consolidated Financial Statements and related disclosures. The Company currently anticipates that an increase to the allowance for credit losses will be recognized upon adoption to provide for the expected credit losses over the estimated life of the financial assets. The magnitude of the increase will depend on economic conditions and trends in the Company’s portfolio at the time of adoption.
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ASU2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | This ASU amends ASC Topic 350,Intangibles - Goodwill and Other, to simplify the subsequent measurement of goodwill, by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This ASU requires an entity to recognize an impairment charge for the amount by which a reporting unit’s carrying amount exceeds its fair value, with the loss limited to the total amount of goodwill allocated to that reporting unit. The ASU must be applied on a prospective basis. | January 1, 2020
Early adoption is permitted. | Based on the Company’s most recent qualitative goodwill impairment assessment performed as of October 1, 2018, there were no reporting units for which it wasmore-likely-than-not that the carrying amount of a reporting unit exceeded its respective fair value; therefore, this ASU would not currently have an impact on the Company’s Consolidated Financial Statements or related disclosures. However, if subsequent to adoption, the carrying amount of a reporting unit exceeds its respective fair value, the Company would be required to recognize an impairment charge for the amount that the carrying value exceeds the fair value. | |||
ASU2018-15, Intangibles - Goodwill and Other -Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | This ASU amends ASC Subtopic350-40,Intangibles - Goodwill and Other -Internal-Use Software, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include aninternal-use software license). The Company may apply this ASU either retrospectively, or prospectively to all implementation costs incurred after the date of adoption. | January 1, 2020
Early adoption is permitted. | The Company’s current accounting policy for capitalizing implementation costs incurred in a hosting arrangement generally aligns with the requirements of this ASU; therefore, the Company’s adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements or related disclosures. |
8
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 2 – REVENUE RECOGNITION
The following tables reflect the Company’s noninterest income disaggregated by financial statement line item, business segment, and by the amount of each revenue stream that is in scope and out of scope of ASC Topic 606,Revenue from Contracts with Customers. Refer to Note 1, “Significant Accounting Policies,” and Note 2, “Revenue Recognition,” to
the Company’s 2018 Annual Report on Form10-K, for information regarding the Company’s accounting policies for recognizing noninterest income, including the nature and timing of such revenue streams. The Company’s contracts with customers generally do not contain terms that require significant judgment to determine the amount of revenue to recognize.
Three Months Ended March 31, 2019 | ||||||||||||||||
(Dollars in millions) | Consumer 1 | Wholesale 1 | Out of Scope 1, 2 | Total | ||||||||||||
Noninterest income | ||||||||||||||||
Service charges on deposit accounts | $104 | $33 | $— | $137 | ||||||||||||
Other charges and fees3 | 27 | 4 | 56 | 87 | ||||||||||||
Card fees | 55 | 26 | 1 | 82 | ||||||||||||
Investment banking income | — | 72 | 58 | 130 | ||||||||||||
Trading income | — | — | 60 | 60 | ||||||||||||
Mortgage related income | — | — | 100 | 100 | ||||||||||||
Trust and investment management income | 71 | — | — | 71 | ||||||||||||
Retail investment services4 | 69 | — | — | 69 | ||||||||||||
Commercial real estate related income | — | — | 24 | 24 | ||||||||||||
Net securities gains/(losses) | — | — | — | — | ||||||||||||
Other noninterest income | 6 | — | 18 | 24 | ||||||||||||
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Total noninterest income | $332 | $135 | $317 | $784 | ||||||||||||
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1 | Consumer total noninterest income and Wholesale total noninterest income exclude $114 million and $229 million of out of scope noninterest income, respectively, which are included in the business segment results presented on a management accounting basis in Note 19, “Business Segment Reporting.” Out of scope total noninterest income includes these amounts and also includes ($26) million of Corporate Other noninterest income that is not subject to ASC Topic 606. |
2 | The Company presents out of scope noninterest income for the purpose of reconciling noninterest income amounts within the scope of ASC Topic 606 to noninterest income amounts presented on the Company’s Consolidated Statements of Income. |
3 | The Company recognized an immaterial amount of insurance trailing commissions, the majority of which related to performance obligations satisfied in prior periods. |
4 | The Company recognized $11 million of mutual fund12b-1 fees and annuity trailing commissions, the majority of which related to performance obligations satisfied in periods prior to March 31, 2019. |
Three Months Ended March 31, 2018 | ||||||||||||||||
(Dollars in millions) | Consumer 1 | Wholesale 1 | Out of Scope 1, 2 | Total | ||||||||||||
Noninterest income | ||||||||||||||||
Service charges on deposit accounts | $104 | $42 | $— | $146 | ||||||||||||
Other charges and fees3, 4 | 28 | 3 | 54 | 85 | ||||||||||||
Card fees | 54 | 26 | 1 | 81 | ||||||||||||
Investment banking income3 | — | 86 | 47 | 133 | ||||||||||||
Trading income | — | — | 42 | 42 | ||||||||||||
Mortgage related income | — | — | 90 | 90 | ||||||||||||
Trust and investment management income | 75 | — | — | 75 | ||||||||||||
Retail investment services5 | 71 | 1 | — | 72 | ||||||||||||
Commercial real estate related income | — | — | 23 | 23 | ||||||||||||
Net securities gains/(losses) | — | — | 1 | 1 | ||||||||||||
Other noninterest income | 6 | — | 42 | 48 | ||||||||||||
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Total noninterest income | $338 | $158 | $300 | $796 | ||||||||||||
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1 | Consumer total noninterest income and Wholesale total noninterest income exclude $112 million and $182 million of out of scope noninterest income, respectively, which are included in the business segment results presented on a management accounting basis in Note 19, “Business Segment Reporting.” Out of scope total noninterest income includes these amounts and also includes $6 million of Corporate Other noninterest income that is not subject to ASC Topic 606. |
2 | The Company presents out of scope noninterest income for the purpose of reconciling noninterest income amounts within the scope of ASC Topic 606 to noninterest income amounts presented on the Company’s Consolidated Statements of Income. |
3 | Beginning July 1, 2018, the Company began presenting bridge commitment fee income related to capital market transactions in Investment banking income on the Consolidated Statements of Income. For periods prior to July 1, 2018, this income was previously presented in Other charges and fees and has been reclassified to Investment banking income for comparability. |
4 | The Company recognized an immaterial amount of insurance trailing commissions, the majority of which related to performance obligations satisfied in prior periods. |
5 | The Company recognized $13 million of mutual fund12b-1 fees and annuity trailing commissions, the majority of which related to performance obligations satisfied in periods prior to March 31, 2018. |
9
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 3 - FEDERAL FUNDS SOLD AND SECURITIES FINANCING ACTIVITIES
Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell
Fed Funds sold and securities borrowed or purchased under agreements to resell were as follows:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Fed funds sold | $— | $42 | ||||||
Securities borrowed | 468 | 394 | ||||||
Securities purchased under agreements to resell | 918 | 1,243 | ||||||
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Total Fed funds sold and securities borrowed or purchased under agreements to resell | $1,386 | $1,679 | ||||||
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Securities purchased under agreements to resell are primarily collateralized by U.S. government or agency securities and are carried at the amounts at which the securities will be subsequently resold, plus accrued interest. Securities borrowed are primarily collateralized by corporate securities. The Company borrows securities and purchases securities under agreements to resell as part of its securities financing activities. On the acquisition date of these securities, the Company and the
related counterparty agree on the amount of collateral required to secure the principal amount loaned under these arrangements. The Company monitors collateral values daily and calls for additional collateral to be provided as warranted under the respective agreements. At March 31, 2019 and December 31, 2018, the total market value of collateral held was $1.4 billion and $1.6 billion, of which $56 million and $108 million was repledged, respectively.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are accounted for as secured borrowings. The following table presents the Company’s related activity, by collateral type and remaining contractual maturity:
March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
(Dollars in millions) | Overnight and Continuous | Up to 30 days | 30-90 days | Total | Overnight and Continuous | Up to 30 days | 30-90 days | Total | ||||||||||||||||||||||||
U.S. Treasury securities | $110 | $— | $— | $110 | $197 | $7 | $— | $204 | ||||||||||||||||||||||||
Federal agency securities | 159 | 8 | — | 167 | 112 | 10 | — | 122 | ||||||||||||||||||||||||
MBS - agency | 993 | 81 | 8 | 1,082 | 881 | 35 | — | 916 | ||||||||||||||||||||||||
CP | 49 | — | — | 49 | 78 | — | — | 78 | ||||||||||||||||||||||||
Corporate and other debt securities | 418 | 64 | 72 | 554 | 216 | 158 | 80 | 454 | ||||||||||||||||||||||||
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Total securities sold under agreements to repurchase | $1,729 | $153 | $80 | $1,962 | $1,484 | $210 | $80 | $1,774 | ||||||||||||||||||||||||
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For securities sold under agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of the collateral pledged. This risk is managed by monitoring the liquidity and credit quality of the collateral, as well as the maturity profile of the transactions.
Netting of Securities - Repurchase and Resell Agreements
The Company has various financial assets and financial liabilities that are subject to enforceable master netting agreements or similar agreements. The Company’s derivatives that are subject to enforceable master netting agreements or similar agreements are discussed in Note 16, “Derivative Financial Instruments.”
The following table presents the Company’s securities borrowed or purchased under agreements to resell and securities sold under agreements to repurchase that are subject to MRAs. Generally, MRAs require collateral to exceed the asset or liability recognized on the balance sheet. Transactions subject to these agreements are treated as collateralized financings, and those with a single counterparty are permitted to be presented net on the Company’s Consolidated Balance Sheets, provided certain criteria are met that permit balance sheet netting. At March 31, 2019 and December 31, 2018, there were no such transactions subject to legally enforceable MRAs that were eligible for balance sheet netting. The following table includes the amount of collateral pledged or received related to exposures subject to enforceable MRAs. While these agreements are typically over-collateralized, the amount of collateral presented in this table is limited to the amount of the related recognized asset or liability for each counterparty.
10
Notes to Consolidated Financial Statements (Unaudited), continued
(Dollars in millions) | Gross Amount | Amount Offset | Net Amount Presented in Consolidated Balance Sheets | Held/Pledged Financial Instruments | Net Amount | |||||||||||||||
March 31, 2019 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Securities borrowed or purchased under agreements to resell | $1,386 | $— | $1,386 | 1 | $1,368 | $18 | ||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Securities sold under agreements to repurchase | 1,962 | — | 1,962 | 1,960 | 2 | |||||||||||||||
| ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Securities borrowed or purchased under agreements to resell | $1,637 | $— | $1,637 | 1 | $1,624 | $13 | ||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Securities sold under agreements to repurchase | 1,774 | — | 1,774 | 1,774 | — |
1 Excludes $0 and $42 million of Fed Funds sold, which are not subject to a master netting agreement at March 31, 2019 and December 31, 2018, respectively.
NOTE 4 - TRADING ASSETS AND LIABILITIES AND DERIVATIVE INSTRUMENTS
The fair values of the components of trading assets and liabilities and derivative instruments are presented in the following table:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Trading Assets and Derivative Instruments: | ||||||||
U.S. Treasury securities | $258 | $262 | ||||||
Federal agency securities | 281 | 188 | ||||||
U.S. states and political subdivisions | 33 | 54 | ||||||
MBS - agency | 814 | 860 | ||||||
Corporate and other debt securities | 889 | 700 | ||||||
CP | 283 | 190 | ||||||
Equity securities | 71 | 73 | ||||||
Derivative instruments1 | 1,028 | 639 | ||||||
Trading loans2 | 2,602 | 2,540 | ||||||
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Total trading assets and derivative instruments | $6,259 | $5,506 | ||||||
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Trading Liabilities and Derivative Instruments: | ||||||||
U.S. Treasury securities | $873 | $801 | ||||||
MBS - agency | 3 | 3 | ||||||
Corporate and other debt securities | 456 | 385 | ||||||
Equity securities | 13 | 5 | ||||||
Derivative instruments1 | 264 | 410 | ||||||
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Total trading liabilities and derivative instruments | $1,609 | $1,604 | ||||||
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1 | Amounts include the impact of offsetting cash collateral received from and paid to the same derivative counterparties, and the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement or similar agreement exists. |
2 | Includes loans related to TRS. |
Various trading and derivative instruments are used as part of the Company’s overall balance sheet management strategies and to support client requirements executed through the Bank and/or STRH, a broker/dealer subsidiary of the Company. The Company manages the potential market volatility associated with trading instruments by using appropriate risk management strategies. The size, volume, and nature of the trading products and derivative instruments can vary based on economic conditions as well as client-specific and Company-specific asset or liability positions.
Product offerings to clients include debt securities, loans traded in the secondary market, equity securities, derivative contracts, and other similar financial instruments. Other trading-
related activities include acting as a market maker for certain debt and equity security transactions, derivative instrument transactions, and foreign exchange transactions. The Company also uses derivatives to manage its interest rate and market risk fromnon-trading activities. The Company has policies and procedures to manage market risk associated with client trading andnon-trading activities, and assumes a limited degree of market risk by managing the size and nature of its exposure. For valuation assumptions and additional information related to the Company’s trading products and derivative instruments, see Note 16, “Derivative Financial Instruments,” Note 17, “Fair Value Election and Measurement,” and the Company’s 2018 Annual Report on Form10-K.
11
Notes to Consolidated Financial Statements (Unaudited), continued
Pledged trading assets are presented in the following table:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Pledged trading assets to secure repurchase agreements1 | $1,337 | $1,418 | ||||||
Pledged trading assets to secure certain derivative agreements | 43 | 22 | ||||||
Pledged trading assets to secure other arrangements | 40 | 40 |
1 Repurchase agreements secured by collateral totaled $1.3 billion and $1.4 billion at March 31, 2019 and December 31, 2018, respectively.
NOTE 5 – INVESTMENT SECURITIES
Investment Securities Portfolio Composition
March 31, 2019 | ||||||||||||||||
(Dollars in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Securities AFS: | ||||||||||||||||
U.S. Treasury securities | $4,279 | $4 | $24 | $4,259 | ||||||||||||
Federal agency securities | 143 | 1 | 2 | 142 | ||||||||||||
U.S. states and political subdivisions | 594 | 6 | 7 | 593 | ||||||||||||
MBS - agency residential | 23,149 | 207 | 146 | 23,210 | ||||||||||||
MBS - agency commercial | 2,641 | 20 | 37 | 2,624 | ||||||||||||
MBS -non-agency commercial | 1,009 | 7 | 4 | 1,012 | ||||||||||||
Corporate and other debt securities | 13 | — | — | 13 | ||||||||||||
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Total securities AFS | $31,828 | $245 | $220 | $31,853 | ||||||||||||
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December 31, 2018 | ||||||||||||||||
(Dollars in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Securities AFS: | ||||||||||||||||
U.S. Treasury securities | $4,277 | $— | $66 | $4,211 | ||||||||||||
Federal agency securities | 221 | 2 | 2 | 221 | ||||||||||||
U.S. states and political subdivisions | 606 | 4 | 21 | 589 | ||||||||||||
MBS - agency residential | 23,161 | 128 | 425 | 22,864 | ||||||||||||
MBS - agency commercial | 2,688 | 8 | 69 | 2,627 | ||||||||||||
MBS -non-agency commercial | 943 | — | 27 | 916 | ||||||||||||
Corporate and other debt securities | 14 | — | — | 14 | ||||||||||||
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Total securities AFS | $31,910 | $142 | $610 | $31,442 | ||||||||||||
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The following table presents interest on securities AFS:
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Taxable interest | $217 | $201 | ||||||
Tax-exempt interest | 4 | 5 | ||||||
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Total interest on securities AFS | $221 | $206 | ||||||
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Investment securities pledged to secure public deposits, repurchase agreements, trusts, certain derivative agreements, and other funds had a fair value of $3.3 billion at both March 31, 2019 and December 31, 2018.
12
Notes to Consolidated Financial Statements (Unaudited), continued
The following table presents the amortized cost, fair value, and weighted average yield of the Company’s investment securities at March 31, 2019, by remaining contractual maturity, with the exception of MBS, which are based on estimated average life. Receipt of cash flows may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Distribution of Remaining Maturities | ||||||||||||||||||||
(Dollars in millions) | Due in 1 Year or Less | Due After 1 Year through 5 Years | Due After 5 Years through 10 Years | Due After 10 Years | Total | |||||||||||||||
Amortized Cost: | ||||||||||||||||||||
Securities AFS: | ||||||||||||||||||||
U.S. Treasury securities | $649 | $2,312 | $1,318 | $— | $4,279 | |||||||||||||||
Federal agency securities | 39 | 33 | 4 | 67 | 143 | |||||||||||||||
U.S. states and political subdivisions | 1 | 91 | 44 | 458 | 594 | |||||||||||||||
MBS - agency residential | 1,494 | 3,800 | 17,081 | 774 | 23,149 | |||||||||||||||
MBS - agency commercial | — | 646 | 1,672 | 323 | 2,641 | |||||||||||||||
MBS -non-agency commercial | — | 12 | 976 | 21 | 1,009 | |||||||||||||||
Corporate and other debt securities | — | 13 | — | — | 13 | |||||||||||||||
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Total securities AFS | $2,183 | $6,907 | $21,095 | $1,643 | $31,828 | |||||||||||||||
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Fair Value: | ||||||||||||||||||||
Securities AFS: | ||||||||||||||||||||
U.S. Treasury securities | $645 | $2,295 | $1,319 | $— | $4,259 | |||||||||||||||
Federal agency securities | 39 | 33 | 4 | 66 | 142 | |||||||||||||||
U.S. states and political subdivisions | 1 | 95 | 45 | 452 | 593 | |||||||||||||||
MBS - agency residential | 1,544 | 3,809 | 17,086 | 771 | 23,210 | |||||||||||||||
MBS - agency commercial | — | 639 | 1,669 | 316 | 2,624 | |||||||||||||||
MBS -non-agency commercial | — | 12 | 979 | 21 | 1,012 | |||||||||||||||
Corporate and other debt securities | — | 13 | — | — | 13 | |||||||||||||||
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Total securities AFS | $2,229 | $6,896 | $21,102 | $1,626 | $31,853 | |||||||||||||||
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Weighted average yield1 | 2.78 | % | 2.36 | % | 3.01 | % | 3.08 | % | 2.86 | % |
1 Weighted average yields are based on amortized cost and presented on an FTE basis.
13
Notes to Consolidated Financial Statements (Unaudited), continued
Investment Securities in an Unrealized Loss Position
The Company held certain investment securities where amortized cost exceeded fair value, resulting in unrealized loss positions. Market changes in interest rates and credit spreads may result in temporary unrealized losses as the market prices of securities fluctuate. At March 31, 2019, the Company did not intend to sell these securities nor was itmore-likely-than-not that
the Company would be required to sell these securities before their anticipated recovery or maturity. The Company reviewed its portfolio for OTTI in accordance with the accounting policies described in Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K.
Investment securities in an unrealized loss position at period end are presented in the following tables:
March 31, 2019 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized1 Losses | Fair Value | Unrealized1 Losses | Fair Value | Unrealized 1 Losses | ||||||||||||||||||
Temporarily impaired securities AFS: | ||||||||||||||||||||||||
U.S. Treasury securities | $— | $— | $2,646 | $24 | $2,646 | $24 | ||||||||||||||||||
Federal agency securities | 5 | — | 61 | 2 | 66 | 2 | ||||||||||||||||||
U.S. states and political subdivisions | — | — | 433 | 7 | 433 | 7 | ||||||||||||||||||
MBS - agency residential | 1 | — | 13,125 | 146 | 13,126 | 146 | ||||||||||||||||||
MBS - agency commercial | 19 | — | 1,723 | 37 | 1,742 | 37 | ||||||||||||||||||
MBS -non-agency commercial | 21 | — | 370 | 4 | 391 | 4 | ||||||||||||||||||
Corporate and other debt securities | — | — | 7 | — | 7 | — | ||||||||||||||||||
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Total temporarily impaired securities AFS | 46 | — | 18,365 | 220 | 18,411 | 220 | ||||||||||||||||||
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OTTI securities AFS2: | ||||||||||||||||||||||||
Total OTTI securities AFS | — | — | — | — | — | — | ||||||||||||||||||
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Total impaired securities AFS | $46 | $— | $18,365 | $220 | $18,411 | $220 | ||||||||||||||||||
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1 Unrealized losses less than $0.5 million are presented as zero within the table. 2 OTTI securities AFS are impaired securities for which OTTI credit losses have been previously recognized in earnings. |
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December 31, 2018 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized1 Losses | Fair Value | Unrealized1 Losses | Fair Value | Unrealized 1 Losses | ||||||||||||||||||
Temporarily impaired securities AFS: | ||||||||||||||||||||||||
U.S. Treasury securities | $— | $— | $4,177 | $66 | $4,177 | $66 | ||||||||||||||||||
Federal agency securities | — | — | 63 | 2 | 63 | 2 | ||||||||||||||||||
U.S. states and political subdivisions | 49 | 1 | 430 | 20 | 479 | 21 | ||||||||||||||||||
MBS - agency residential | 1,229 | 5 | 15,384 | 420 | 16,613 | 425 | ||||||||||||||||||
MBS - agency commercial | 68 | — | 1,986 | 69 | 2,054 | 69 | ||||||||||||||||||
MBS -non-agency commercial | 106 | 1 | 773 | 26 | 879 | 27 | ||||||||||||||||||
Corporate and other debt securities | — | — | 9 | — | 9 | — | ||||||||||||||||||
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Total temporarily impaired securities AFS | 1,452 | 7 | 22,822 | 603 | 24,274 | 610 | ||||||||||||||||||
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OTTI securities AFS2: | ||||||||||||||||||||||||
Total OTTI securities AFS | — | — | — | — | — | — | ||||||||||||||||||
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| |||||||
Total impaired securities AFS | $1,452 | $7 | $22,822 | $603 | $24,274 | $610 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Unrealized losses less than $0.5 million are presented as zero within the table. |
2 | OTTI securities AFS are impaired securities for which OTTI credit losses have been previously recognized in earnings. |
The Company does not consider the unrealized losses on temporarily impaired securities AFS to be credit-related. These unrealized losses were due primarily to market interest rates
being higher than the securities’ stated coupon rates, and therefore, they were recorded in AOCI, net of tax.
14
Notes to Consolidated Financial Statements (Unaudited), continued
Realized Gains and Losses and Other-Than-Temporarily Impaired Securities
Net securities gains or losses are comprised of gross realized gains, gross realized losses, and OTTI credit losses recognized in earnings. For both the three months ended March 31, 2019 and 2018, gross realized gains and gross realized losses were immaterial, and there were no OTTI credit losses recognized in earnings.
Investment securities in an unrealized loss position are evaluated quarterly for other-than-temporary credit impairment, which is determined using cash flow analyses that take into account security specific collateral and transaction structure. Future expected credit losses are determined using various assumptions, the most significant of which include default rates, prepayment rates, and loss severities. If, based on this analysis, a security is in an unrealized loss position and the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are then discounted at the security’s initial effective interest rate to arrive at a present value amount. Credit losses on the OTTI security are recognized in earnings and reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis
of the security. Subsequent credit losses may be recorded on OTTI securities without a corresponding further decline in fair value when there has been a decline in expected cash flows. See Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K for additional information regarding the Company’s accounting policy on securities AFS and related impairments.
The Company seeks to reduce its exposure on any existing OTTI securities primarily through paydowns. In certain instances, the amount of credit losses recognized in earnings on a debt security exceeds the total unrealized losses on the security, which may result in unrealized gains relating to factors other than credit recorded in AOCI, net of tax.
During the three months ended March 31, 2019 and 2018, there were no credit impairment losses recognized on securities AFS held at the end of the period. The accumulated balance of OTTI credit losses recognized in earnings on securities AFS held at period end was zero and $23 million at March 31, 2019 and 2018, respectively.
15
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 6 - LOANS
Composition of Loan Portfolio
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Commercial loans: | ||||||||
C&I1 | $73,278 | $71,137 | ||||||
CRE | 7,889 | 7,265 | ||||||
Commercial construction | 2,562 | 2,538 | ||||||
|
|
|
|
|
| |||
Total commercial LHFI | 83,729 | 80,940 | ||||||
|
|
|
|
|
| |||
Consumer loans: | ||||||||
Residential mortgages - guaranteed | 467 | 459 | ||||||
Residential mortgages - nonguaranteed2 | 28,461 | 28,836 | ||||||
Residential home equity products | 9,167 | 9,468 | ||||||
Residential construction | 167 | 184 | ||||||
Guaranteed student | 7,308 | 7,229 | ||||||
Other direct | 11,029 | 10,615 | ||||||
Indirect | 13,268 | 12,419 | ||||||
Credit cards | 1,637 | 1,689 | ||||||
|
|
|
|
|
| |||
Total consumer LHFI | 71,504 | 70,899 | ||||||
|
|
|
|
|
| |||
LHFI | $155,233 | $151,839 | ||||||
|
|
|
|
|
| |||
LHFS3 | $1,781 | $1,468 |
1 | Includes $4.1 billion of sales-type and direct financing leases at both March 31, 2019 and December 31, 2018, and $786 million and $796 million of installment loans at March 31, 2019 and December 31, 2018, respectively. |
2 | Includes $134 million and $163 million of LHFI measured at fair value at March 31, 2019 and December 31, 2018, respectively. |
3 | Includes $1.1 billion and $1.2 billion of LHFS measured at fair value at March 31, 2019 and December 31, 2018, respectively. |
Loan Purchases, Sales, and Transfers |
| |||||||
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Non-routine purchases of LHFI1, 2: | ||||||||
Consumer loans | $173 | $— | ||||||
Routine purchases of LHFI2, 3: | ||||||||
Consumer loans | 445 | 475 | ||||||
Loan sales4, 5: | ||||||||
Commercial loans | 40 | 36 | ||||||
Transfers of loans from: | ||||||||
LHFI to LHFS | 614 | 204 | ||||||
LHFS to LHFI | 4 | 6 | ||||||
LHFI to OREO | 10 | 19 |
1 | Purchases are episodic in nature and are conducted based on specific business strategies. |
2 | Represents UPB of loans purchased. |
3 | Purchases are routine in nature and are conducted in the normal course of business. |
4 | Excludes sales of residential and commercial mortgage LHFS conducted in the normal course of business. |
5 | Net gain on loan sales was immaterial for the three months ended March 31, 2019 and 2018. |
At March 31, 2019 and December 31, 2018, the Company had $30.2 billion and $28.1 billion of net eligible loan collateral pledged to the Federal Reserve discount window to support
$22.6 billion and $21.3 billion of available, unused borrowing capacity, respectively.
At March 31, 2019 and December 31, 2018, the Company had $39.8 billion and $39.2 billion of net eligible loan collateral pledged to the FHLB of Atlanta to support $32.1 billion and $31.0 billion of available borrowing capacity, respectively. The available FHLB borrowing capacity at March 31, 2019 was used to support $8.3 billion of long-term debt and $4.2 billion of letters of credit issued on the Company’s behalf. At December 31, 2018, the available FHLB borrowing capacity was used to support $5.0 billion of long-term debt and $5.8 billion of letters of credit issued on the Company’s behalf.
Credit Quality Evaluation
The Company evaluates the credit quality of its LHFI portfolio by employing a dual internal risk rating system, which assigns both PD and LGD ratings to derive expected losses. Assignment of these ratings are predicated upon numerous factors, including consumer credit risk scores, rating agency information, borrower/guarantor financial capacity, LTV ratios, collateral type, debt service coverage ratios, collection experience, other internal metrics/analyses, and/or qualitative assessments.
For the commercial portfolio, the Company believes that the most appropriate credit quality indicator is an individual loan’s risk assessment expressed according to the broad regulatory agency classifications of Pass or Criticized. The Company conforms to the following regulatory classifications for Criticized assets: Other Assets Especially Mentioned (or Special Mention), Substandard, Doubtful, and Loss. However, for the purposes of disclosure, management believes the most meaningful distinction within the Criticized categories is between Criticized accruing (which includes Special Mention and a portion of Substandard) and Criticized nonaccruing (which includes a portion of Substandard as well as Doubtful and Loss). This distinction identifies those relatively higher risk loans for which there is a basis to believe that the Company will not collect all amounts due under those loan agreements. The Company’s risk rating system is more granular, with multiple risk ratings in both the Pass and Criticized categories. Pass ratings reflect relatively low PD s; whereas, Criticized assets have higher PD s. The granularity in Pass ratings assists in establishing pricing, loan structures, approval requirements, reserves, and ongoing credit management requirements. Commercial risk ratings are refreshed at least annually, or more frequently as appropriate, based upon considerations such as market conditions, borrower characteristics, and portfolio trends. Additionally, management routinely reviews portfolio risk ratings, trends, and concentrations to support risk identification and mitigation activities. As reflected in the following risk rating table, the increases in Pass and Criticized accruing C&I loans at March 31, 2019 compared to December 31, 2018, were due to loan growth and normal variability in the portfolio. Criticized nonaccruing C&I loans remained low relative to accruing loans.
For consumer loans, the Company monitors credit risk based on indicators such as delinquencies and FICO scores. The Company believes that consumer credit risk, as assessed by the industry-wide FICO scoring method, is a relevant credit quality indicator. Borrower-specific FICO scores are obtained at
16
Notes to Consolidated Financial Statements (Unaudited), continued
origination as part of the Company’s formal underwriting process, and refreshed FICO scores are obtained by the Company at least quarterly.
For guaranteed loans, the Company monitors the credit quality based primarily on delinquency status, as it is a more relevant indicator of credit quality due to the government guarantee. At March 31, 2019 and December 31, 2018, 30% and
27%, respectively, of guaranteed residential mortgages were current with respect to payments. At March 31, 2019 and December 31, 2018, 73% and 72%, respectively, of guaranteed student loans were current with respect to payments. The Company’s loss exposure on guaranteed residential mortgages and student loans is mitigated by the government guarantee.
LHFI by credit quality indicator are presented in the following tables:
Commercial Loans | ||||||||||||||||||||||||
C&I | CRE | Commercial Construction | ||||||||||||||||||||||
(Dollars in millions) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | ||||||||||||||||||
Risk rating: | ||||||||||||||||||||||||
Pass | $71,078 | $69,095 | $7,761 | $7,165 | $2,543 | $2,459 | ||||||||||||||||||
Criticized accruing | 2,003 | 1,885 | 126 | 98 | 19 | 79 | ||||||||||||||||||
Criticized nonaccruing | 197 | 157 | 2 | 2 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total | $73,278 | $71,137 | $7,889 | $7,265 | $2,562 | $2,538 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans 1 | ||||||||||||||||||||||||
Residential Mortgages - Nonguaranteed | Residential Home Equity Products | Residential Construction | ||||||||||||||||||||||
(Dollars in millions) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | ||||||||||||||||||
Current FICO score range: | ||||||||||||||||||||||||
700 and above | $25,541 | $25,764 | $7,761 | $8,060 | $137 | $151 | ||||||||||||||||||
620 - 699 | 2,288 | 2,367 | 1,003 | 1,015 | 24 | 27 | ||||||||||||||||||
Below 6202 | 632 | 705 | 403 | 393 | 6 | 6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total | $28,461 | $28,836 | $9,167 | $9,468 | $167 | $184 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Direct | Indirect | Credit Cards | ||||||||||||||||||||||
(Dollars in millions) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | ||||||||||||||||||
Current FICO score range: | ||||||||||||||||||||||||
700 and above | $9,990 | $9,642 | $10,008 | $9,315 | $1,101 | $1,142 | ||||||||||||||||||
620 - 699 | 996 | 935 | 2,449 | 2,395 | 411 | 420 | ||||||||||||||||||
Below 6202 | 43 | 38 | 811 | 709 | 125 | 127 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total | $11,029 | $10,615 | $13,268 | $12,419 | $1,637 | $1,689 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Excludes $7.3 billion and $7.2 billion of guaranteed student loans and $467 million and $459 million of guaranteed residential mortgages at March 31, 2019 and December 31, 2018, respectively, for which there was nominal risk of principal loss due to the government guarantee. |
2 | For substantially all loans with refreshed FICO scores below 620, the borrower’s FICO score at the time of origination exceeded 620 but has since deteriorated as the loan has seasoned. |
17
Notes to Consolidated Financial Statements (Unaudited), continued
The LHFI portfolio by payment status is presented in the following tables:
March 31, 2019 | ||||||||||||||||||||
Accruing | ||||||||||||||||||||
(Dollars in millions) | Current | 30-89 Days Past Due | 90+ Days Past Due | Nonaccruing 1 | Total | |||||||||||||||
Commercial loans: | ||||||||||||||||||||
C&I | $73,016 | $49 | $16 | $197 | $73,278 | |||||||||||||||
CRE | 7,885 | 2 | — | 2 | 7,889 | |||||||||||||||
Commercial construction | 2,561 | 1 | — | — | 2,562 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total commercial LHFI | 83,462 | 52 | 16 | 199 | 83,729 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer loans: | ||||||||||||||||||||
Residential mortgages - guaranteed | 141 | 35 | 291 | — | 3 | 467 | ||||||||||||||
Residential mortgages - nonguaranteed2 | 28,215 | 50 | 18 | 178 | 28,461 | |||||||||||||||
Residential home equity products | 8,983 | 60 | — | 124 | 9,167 | |||||||||||||||
Residential construction | 158 | — | 1 | 8 | 167 | |||||||||||||||
Guaranteed student | 5,350 | 648 | 1,310 | — | 3 | 7,308 | ||||||||||||||
Other direct | 10,970 | 47 | 4 | 8 | 11,029 | |||||||||||||||
Indirect | 13,183 | 79 | 1 | 5 | 13,268 | |||||||||||||||
Credit cards | 1,603 | 16 | 18 | — | 1,637 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total consumer LHFI | 68,603 | 935 | 1,643 | 323 | 71,504 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total LHFI | $152,065 | $987 | $1,659 | $522 | $155,233 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Includes nonaccruing LHFI past due 90 days or more of $296 million. Nonaccruing LHFI past due fewer than 90 days include nonaccrual LHFI modified in TDRs, performing second lien LHFI where the first lien loan is nonperforming, and certain energy-related commercial LHFI. |
2 | Includes $134 million of LHFI measured at fair value, the majority of which were accruing current. |
3 | Guaranteed LHFI are not placed on nonaccrual status regardless of delinquency because collection of principal and interest is reasonably assured by the government. |
December 31, 2018 | ||||||||||||||||||||
Accruing | ||||||||||||||||||||
(Dollars in millions) | Current | 30-89 Days Past Due | 90+ Days Past Due | Nonaccruing 1 | Total | |||||||||||||||
Commercial loans: | ||||||||||||||||||||
C&I | $70,901 | $64 | $15 | $157 | $71,137 | |||||||||||||||
CRE | 7,259 | 3 | 1 | 2 | 7,265 | |||||||||||||||
Commercial construction | 2,538 | — | — | — | 2,538 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total commercial LHFI | 80,698 | 67 | 16 | 159 | 80,940 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer loans: | ||||||||||||||||||||
Residential mortgages - guaranteed | 125 | 39 | 295 | — | 3 | 459 | ||||||||||||||
Residential mortgages - nonguaranteed2 | 28,552 | 70 | 10 | 204 | 28,836 | |||||||||||||||
Residential home equity products | 9,268 | 62 | — | 138 | 9,468 | |||||||||||||||
Residential construction | 170 | 3 | — | 11 | 184 | |||||||||||||||
Guaranteed student | 5,236 | 685 | 1,308 | — | 3 | 7,229 | ||||||||||||||
Other direct | 10,559 | 45 | 4 | 7 | 10,615 | |||||||||||||||
Indirect | 12,286 | 125 | 1 | 7 | 12,419 | |||||||||||||||
Credit cards | 1,654 | 17 | 18 | — | 1,689 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total consumer LHFI | 67,850 | 1,046 | 1,636 | 367 | 70,899 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total LHFI | $148,548 | $1,113 | $1,652 | $526 | $151,839 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Includes nonaccruing LHFI past due 90 days or more of $306 million. Nonaccruing LHFI past due fewer than 90 days include nonaccrual LHFI modified in TDRs, performing second lien LHFI where the first lien loan is nonperforming, and certain energy-related commercial LHFI. |
2 | Includes $163 million of LHFI measured at fair value, the majority of which were accruing current. |
3 | Guaranteed LHFI are not placed on nonaccrual status regardless of delinquency because collection of principal and interest is reasonably assured by the government. |
18
Notes to Consolidated Financial Statements (Unaudited), continued
Impaired Loans
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Commercial nonaccrual loans greater than $3 million and certain commercial and consumer LHFI whose terms have been modified in a TDR are individually evaluated for
impairment. Smaller-balance homogeneous LHFI that are collectively evaluated for impairment and LHFI measured at fair value are not included in the following tables. Additionally, the following tables exclude guaranteed student loans and guaranteed residential mortgages for which there was nominal risk of principal loss due to the government guarantee.
March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
(Dollars in millions) | Unpaid Principal Balance | Carrying 1 Value | Related ALLL | Unpaid Principal Balance | Carrying 1 Value | Related ALLL | ||||||||||||||||||
Impaired LHFI with no ALLL recorded: |
| |||||||||||||||||||||||
Commercial loans: | ||||||||||||||||||||||||
C&I | $88 | $69 | $— | $132 | $79 | $— | ||||||||||||||||||
CRE | — | — | — | 10 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total commercial LHFI with no ALLL recorded | 88 | 69 | — | 142 | 79 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer loans: | ||||||||||||||||||||||||
Residential mortgages - nonguaranteed | 376 | 299 | — | 501 | 397 | — | ||||||||||||||||||
Residential construction | 8 | 4 | — | 12 | 7 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total consumer LHFI with no ALLL recorded | 384 | 303 | — | 513 | 404 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| ||||||||||||||||||||||||
Impaired LHFI with an ALLL recorded: | ||||||||||||||||||||||||
Commercial loans: | ||||||||||||||||||||||||
C&I | 205 | 191 | 39 | 81 | 70 | 13 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total commercial LHFI with an ALLL recorded | 205 | 191 | 39 | 81 | 70 | 13 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer loans: | ||||||||||||||||||||||||
Residential mortgages - nonguaranteed | 594 | 589 | 58 | 1,006 | 984 | 96 | ||||||||||||||||||
Residential home equity products | 826 | 779 | 45 | 849 | 799 | 44 | ||||||||||||||||||
Residential construction | 76 | 73 | 5 | 79 | 76 | 6 | ||||||||||||||||||
Other direct | 56 | 56 | — | 57 | 57 | 1 | ||||||||||||||||||
Indirect | 134 | 133 | 5 | 133 | 133 | 5 | ||||||||||||||||||
Credit cards | 31 | 9 | 2 | 30 | 9 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total consumer LHFI with an ALLL recorded | 1,717 | 1,639 | 115 | 2,154 | 2,058 | 154 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total impaired LHFI | $2,394 | $2,202 | $154 | $2,890 | $2,611 | $167 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Carrying value reflects charge-offs that have been recognized plus other amounts that have been applied to adjust the net book balance. |
Included in the impaired LHFI carrying values above at March 31, 2019 and December 31, 2018 were $1.8 billion and $2.3 billion, respectively, of accruing TDRs held for investment, of which 97% were current. See Note 1, “Significant Accounting
Policies,” to the Company’s 2018 Annual Report on Form 10-K, for further information regarding the Company’s loan impairment policy.
19
Notes to Consolidated Financial Statements (Unaudited), continued
Three Months Ended March 31 | ||||||||||||||||
2019 | 2018 | |||||||||||||||
(Dollars in millions) | Average Carrying Value | Interest1 Income Recognized | Average Carrying Value | Interest 1 Income Recognized | ||||||||||||
Impaired LHFI with no ALLL recorded: |
| |||||||||||||||
Commercial loans: | ||||||||||||||||
C&I | $76 | $1 | $20 | $— | ||||||||||||
CRE | — | — | 21 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total commercial LHFI with no ALLL recorded | 76 | 1 | 41 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Consumer loans: | ||||||||||||||||
Residential mortgages - nonguaranteed | 300 | 4 | 353 | 4 | ||||||||||||
Residential construction | 4 | — | 6 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total consumer LHFI with no ALLL recorded | 304 | 4 | 359 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
| ||||||||||||||||
Impaired LHFI with an ALLL recorded: | ||||||||||||||||
Commercial loans: | ||||||||||||||||
C&I | 190 | — | 149 | 1 | ||||||||||||
CRE | — | — | 25 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total commercial LHFI with an ALLL recorded | 190 | — | 174 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Consumer loans: | ||||||||||||||||
Residential mortgages - nonguaranteed | 617 | 13 | 1,093 | 12 | ||||||||||||
Residential home equity products | 781 | 9 | 873 | 9 | ||||||||||||
Residential construction | 74 | 1 | 90 | 1 | ||||||||||||
Other direct | 55 | 1 | 57 | 1 | ||||||||||||
Indirect | 136 | 2 | 131 | 2 | ||||||||||||
Credit cards | 9 | — | 7 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total consumer LHFI with an ALLL recorded | 1,672 | 26 | 2,251 | 25 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total impaired LHFI | $2,242 | $31 | $2,825 | $30 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
1 | Of the interest income recognized during the three months ended March 31, 2019 and 2018, cash basis interest income was immaterial. |
20
Notes to Consolidated Financial Statements (Unaudited), continued
NPAs are presented in the following table:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
NPAs: | ||||||||
Commercial NPLs: | ||||||||
C&I | $197 | $157 | ||||||
CRE | 2 | 2 | ||||||
Consumer NPLs: | ||||||||
Residential mortgages - nonguaranteed | 178 | 204 | ||||||
Residential home equity products | 124 | 138 | ||||||
Residential construction | 8 | 11 | ||||||
Other direct | 8 | 7 | ||||||
Indirect | 5 | 7 | ||||||
|
|
|
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| |||
Total nonaccrual LHFI/NPLs1 | 522 | 526 | ||||||
OREO2 | 53 | 54 | ||||||
Other repossessed assets | 9 | 9 | ||||||
Nonperforming LHFS | 64 | — | ||||||
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Total NPAs | $648 | $589 | ||||||
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1 | Nonaccruing restructured LHFI are included in total nonaccrual LHFI /NPLs. |
2 | Does not include foreclosed real estate related to loans insured by the FHA or guaranteed by the VA. Proceeds due from the FHA and the VA are recorded as a receivable in Other assets in the Consolidated Balance Sheets until the property is conveyed and the funds are received. The receivable related to proceeds due from the FHA and the VA totaled $50 million at both March 31, 2019 and December 31, 2018. |
The Company’s recorded investment of nonaccruing LHFI secured by residential real estate properties for which formal foreclosure proceedings were in process at March 31, 2019 and December 31, 2018 was $86 million and $93 million, respectively. The Company’s recorded investment of accruing LHFI secured by residential real estate properties for which formal foreclosure proceedings were in process at March 31, 2019 and December 31, 2018 was $107 million and $110 million, of which $99 million and $103 million were insured by the FHA or guaranteed by the VA, respectively.
At March 31, 2019, OREO included $49 million of foreclosed residential real estate properties and $2 million of foreclosed commercial real estate properties, with the remaining $2 million related to land.
At December 31, 2018, OREO included $50 million of foreclosed residential real estate properties and $2 million of foreclosed commercial real estate properties, with the remaining $2 million related to land.
21
Notes to Consolidated Financial Statements (Unaudited), continued
Restructured Loans
A TDR is a loan for which the Company has granted an economic concession to a borrower in response to financial difficulty experienced by the borrower, which the Company would not have considered otherwise. When a loan is modified under the terms of a TDR, the Company typically offers the borrower an extension of the loan maturity date and/or a reduction in the original contractual interest rate. In limited situations, the Company may offer to restructure a loan in a manner that
ultimately results in the forgiveness of a contractually specified principal balance.
At both March 31, 2019 and December 31, 2018, the Company had an immaterial amount of commitments to lend additional funds to debtors whose terms have been modified in a TDR. The number and carrying value of loans modified under the terms of a TDR, by type of modification, are presented in the following tables:
Three Months Ended March 31, 20191 | ||||||||||||||||
(Dollars in millions) | Number of Loans Modified | Rate Modification | Term Extension and/or Other Concessions | Total | ||||||||||||
Commercial loans: | ||||||||||||||||
C&I | 34 | $1 | $56 | $57 | ||||||||||||
Consumer loans: | ||||||||||||||||
Residential mortgages - nonguaranteed | 31 | 1 | 4 | 5 | ||||||||||||
Residential home equity products | 84 | 1 | 6 | 7 | ||||||||||||
Other direct | 140 | — | 2 | 2 | ||||||||||||
Indirect | 568 | — | 15 | 15 | ||||||||||||
Credit cards | 439 | 2 | — | 2 | ||||||||||||
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Total TDR additions | 1,296 | $5 | $83 | $88 | ||||||||||||
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1 Includes loans modified under the terms of a TDR that werecharged-off during the period. |
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Three Months Ended March 31, 2018 1 | ||||||||||||||||
(Dollars in millions) | Number of Loans Modified | Rate Modification | Term Extension and/or Other Concessions | Total | ||||||||||||
Commercial loans: | ||||||||||||||||
C&I | 46 | $— | $56 | $56 | ||||||||||||
Consumer loans: | ||||||||||||||||
Residential mortgages - nonguaranteed | 61 | 9 | 8 | 17 | ||||||||||||
Residential home equity products | 136 | — | 13 | 13 | ||||||||||||
Other direct | 114 | — | 1 | 1 | ||||||||||||
Indirect | 778 | — | 20 | 20 | ||||||||||||
Credit cards | 308 | 1 | 1 | 2 | ||||||||||||
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Total TDR additions | 1,443 | $10 | $99 | $109 | ||||||||||||
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1 Includes loans modified under the terms of a TDR that werecharged-off during the period.
TDRs that defaulted during the three months ended March 31, 2019 and 2018, which were first modified within the previous twelve months, were immaterial. The majority of loans that were modified under the terms of a TDR and subsequently became 90 days or more delinquent have remained on nonaccrual status since the time of delinquency.
Concentrations of Credit Risk
The Company does not have a significant concentration of credit risk to any individual client except for the U.S. government and its agencies. However, a geographic concentration arises because the majority of the Company’s LHFI portfolio represents borrowers that reside in Florida, Georgia, Virginia, Maryland, and North Carolina. The Company’s cross-border outstanding loans totaled $2.0 billion and $1.8 billion at March 31, 2019 and December 31, 2018, respectively.
With respect to collateral concentration, the Company’s recorded investment in residential real estate secured LHFI totaled $38.3 billion at March 31, 2019 and represented 25% of total LHFI. At December 31, 2018, the Company’s recorded investment in residential real estate secured LHFI totaled $38.9 billion and represented 26% of total LHFI. Additionally, at March 31, 2019 and December 31, 2018, the Company had commitments to extend credit on home equity lines of $10.5 billion and $10.3 billion, and had residential mortgage commitments outstanding of $3.1 billion and $2.7 billion, respectively. At both March 31, 2019 and December 31, 2018, 1% of the Company’s LHFI secured by residential real estate was insured by the FHA or guaranteed by the VA.
22
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 7 - ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses consists of the ALLL and the unfunded commitments reserve. Activity in the allowance for credit losses by LHFI segment is presented in the following tables:
Three Months Ended March 31, 2019 | ||||||||||||
(Dollars in millions) | Commercial | Consumer | Total | |||||||||
ALLL, beginning of period | $1,080 | $535 | $1,615 | |||||||||
Provision for loan losses | 84 | 72 | 156 | |||||||||
Loan charge-offs | (33 | ) | (92 | ) | (125 | ) | ||||||
Loan recoveries | 5 | 23 | 28 | |||||||||
Other1 | — | (31 | ) | (31 | ) | |||||||
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| ||||
ALLL, end of period | 1,136 | 507 | 1,643 | |||||||||
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Unfunded commitments reserve, beginning of period2 | 69 | — | 69 | |||||||||
Benefit for unfunded commitments | (3 | ) | — | (3 | ) | |||||||
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Unfunded commitments reserve, end of period2 | 66 | — | 66 | |||||||||
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| ||||
Allowance for credit losses, end of period | $1,202 | $507 | $1,709 | |||||||||
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1 Represents the allowance for restructured loans that were transferred from LHFI to LHFS during the period and subsequently sold in the second quarter of 2019. 2 The unfunded commitments reserve is recorded in Other liabilities in the Consolidated Balance Sheets. |
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Three Months Ended March 31, 2018 | ||||||||||||
(Dollars in millions) | Commercial | Consumer | Total | |||||||||
ALLL, beginning of period | $1,101 | $634 | $1,735 | |||||||||
(Benefit)/provision for loan losses | (16 | ) | 54 | 38 | ||||||||
Loan charge-offs | (23 | ) | (83 | ) | (106 | ) | ||||||
Loan recoveries | 6 | 21 | 27 | |||||||||
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ALLL, end of period | 1,068 | 626 | 1,694 | |||||||||
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Unfunded commitments reserve, beginning of period1 | 79 | — | 79 | |||||||||
Benefit for unfunded commitments | (10 | ) | — | (10 | ) | |||||||
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| ||||
Unfunded commitments reserve, end of period1 | 69 | — | 69 | |||||||||
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| ||||
Allowance for credit losses, end of period | $1,137 | $626 | $1,763 | |||||||||
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1 | The unfunded commitments reserve is recorded in Other liabilities in the Consolidated Balance Sheets. |
As discussed in Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K, the ALLL is composed of both specific allowances for certain nonaccrual loans and TDRs held for investment, and general allowances for groups of LHFI with similar risk characteristics. No allowance
is required for LHFI measured at fair value. Additionally, the Company records an immaterial allowance for LHFI products that are insured by federal agencies or guaranteed by GSEs, as there is nominal risk of principal loss.
23
Notes to Consolidated Financial Statements (Unaudited), continued
The Company’s LHFI portfolio and related ALLL are presented in the following tables:
March 31, 2019 | ||||||||||||||||||||||||
Commercial Loans | Consumer Loans | Total | ||||||||||||||||||||||
(Dollars in millions) | Carrying Value | Related ALLL | Carrying Value | Related ALLL | Carrying Value | Related ALLL | ||||||||||||||||||
LHFI evaluated for impairment: | ||||||||||||||||||||||||
Individually evaluated | $260 | $39 | $1,942 | $115 | $2,202 | $154 | ||||||||||||||||||
Collectively evaluated | 83,469 | 1,097 | 69,428 | 392 | 152,897 | 1,489 | ||||||||||||||||||
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Total evaluated | 83,729 | 1,136 | 71,370 | 507 | 155,099 | 1,643 | ||||||||||||||||||
LHFI measured at fair value | — | — | 134 | — | 134 | — | ||||||||||||||||||
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Total LHFI | $83,729 | $1,136 | $71,504 | $507 | $155,233 | $1,643 | ||||||||||||||||||
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December 31, 2018 | ||||||||||||||||||||||||
Commercial Loans | Consumer Loans | Total | ||||||||||||||||||||||
(Dollars in millions) | Carrying Value | Related ALLL | Carrying Value | Related ALLL | Carrying Value | Related ALLL | ||||||||||||||||||
LHFI evaluated for impairment: | ||||||||||||||||||||||||
Individually evaluated | $149 | $13 | $2,462 | $154 | $2,611 | $167 | ||||||||||||||||||
Collectively evaluated | 80,791 | 1,067 | 68,274 | 381 | 149,065 | 1,448 | ||||||||||||||||||
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Total evaluated | 80,940 | 1,080 | 70,736 | 535 | 151,676 | 1,615 | ||||||||||||||||||
LHFI measured at fair value | — | — | 163 | — | 163 | — | ||||||||||||||||||
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Total LHFI | $80,940 | $1,080 | $70,899 | $535 | $151,839 | $1,615 | ||||||||||||||||||
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NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company conducts a qualitative goodwill assessment at the reporting unit level at least quarterly, or more frequently as events occur or circumstances change that wouldmore-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The Company performed a qualitative goodwill assessment for the Consumer and Wholesale reporting units in the first quarter of 2019, and concluded that a quantitative goodwill impairment test was not necessary for either reporting
unit as it wasmore-likely-than-not that the fair value of both reporting units were greater than their respective carrying amounts. See Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K for additional information and the Company’s goodwill accounting policy.
There were no material changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2019 and 2018.
24
Notes to Consolidated Financial Statements (Unaudited), continued
Other Intangible Assets
Changes in the carrying amount of other intangible assets are presented in the following table:
(Dollars in millions) | Residential MSRs - Fair Value | Commercial Mortgage Servicing Rights and Other | Total | |||||||||
Balance, January 1, 2019 | $1,983 | $79 | $2,062 | |||||||||
Amortization1 | — | (3) | (3 | ) | ||||||||
Servicing rights originated | 63 | 4 | 67 | |||||||||
Changes in fair value: | ||||||||||||
Due to changes in inputs and assumptions2 | (110 | ) | — | (110 | ) | |||||||
Other changes in fair value3 | (52 | ) | — | (52 | ) | |||||||
Servicing rights sold | (1 | ) | — | (1 | ) | |||||||
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| |||||
Balance, March 31, 2019 | $1,883 | $80 | $1,963 | |||||||||
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| |||||
Balance, January 1, 2018 | $1,710 | $81 | $1,791 | |||||||||
Amortization1 | — | (5) | (5 | ) | ||||||||
Servicing rights originated | 76 | 4 | 80 | |||||||||
Servicing rights purchased | 74 | — | 74 | |||||||||
Changes in fair value: | ||||||||||||
Due to changes in inputs and assumptions2 | 111 | — | 111 | |||||||||
Other changes in fair value3 | (55 | ) | — | (55 | ) | |||||||
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Balance, March 31, 2018 | $1,916 | $80 | $1,996 | |||||||||
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1 | Does not include expense associated with community development investments. See Note 11, “Certain Transfers of Financial Assets and Variable Interest Entities,” for additional information. |
2 | Primarily reflects changes in option adjusted spreads and prepayment speed assumptions, due to changes in interest rates. |
3 | Represents changes due to the collection of expected cash flows, net of accretion due to the passage of time. |
The gross carrying value and accumulated amortization of other intangible assets are presented in the following table:
March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
(Dollars in millions) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||
Amortized other intangible assets1: | ||||||||||||||||||||||||
Commercial mortgage servicing rights | $99 | ($32 | ) | $67 | $95 | ($29 | ) | $66 | ||||||||||||||||
Other | 6 | (5 | ) | 1 | 6 | (5 | ) | 1 | ||||||||||||||||
Unamortized other intangible assets: | ||||||||||||||||||||||||
Residential MSRs | 1,883 | — | 1,883 | 1,983 | — | 1,983 | ||||||||||||||||||
Other | 12 | — | 12 | 12 | — | 12 | ||||||||||||||||||
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Total other intangible assets | $2,000 | ($37 | ) | $1,963 | $2,096 | ($34 | ) | $2,062 | ||||||||||||||||
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1 Excludes other intangible assets that are indefinite-lived, carried at fair value, or fully amortized.
Servicing Rights
The Company acquires servicing rights and retains servicing rights for certain of its sales or securitizations of residential mortgages and commercial loans. Servicing rights on residential and commercial mortgages are capitalized by the Company and are classified as Other intangible assets on the Company’s Consolidated Balance Sheets.
Residential Mortgage Servicing Rights
Income earned by the Company on its residential MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs, and is presented in the following table.
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Income from residential MSRs1 | $111 | $107 |
1 | Recognized in Mortgage related income in the Consolidated Statements of Income. |
25
Notes to Consolidated Financial Statements (Unaudited), continued
The UPB of residential mortgage loans serviced for third parties is presented in the following table:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
UPB of loans underlying residential MSRs | $138,793 | $140,801 |
No MSRs on residential loans were purchased during the three months ended March 31, 2019. The Company purchased MSRs on residential loans with a UPB of $5.9 billion during the three months ended March 31, 2018. During the three months ended March 31, 2019 and 2018, the Company sold MSRs on residential loans, at a price approximating their fair value, with a UPB of $518 million and $102 million, respectively.
The Company measures the fair value of its residential MSRs using a valuation model that calculates the present value of estimated future net servicing income using prepayment projections, spreads, and other assumptions. The Consumer Valuation Committee reviews and approves all significant assumption changes at least annually, drawing upon various market and empirical data sources. Changes to valuation model inputs are reflected in the periods’ results. See Note 17, “Fair Value Election and Measurement,” for further information regarding the Company’s residential MSR valuation methodology.
A summary of the significant unobservable inputs used to estimate the fair value of the Company’s residential MSRs and the uncertainty of the fair values in response to 10% and 20% adverse changes in those inputs at the reporting date are presented in the following table.
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Fair value of residential MSRs | $1,883 | $1,983 | ||||||
Prepayment rate assumption (annual) | 13 | % | 13 | % | ||||
Decline in fair value from 10% adverse change | $99 | $96 | ||||||
Decline in fair value from 20% adverse change | 188 | 183 | ||||||
Option adjusted spread (annual) | 2 | % | 2 | % | ||||
Decline in fair value from 10% adverse change | $40 | $44 | ||||||
Decline in fair value from 20% adverse change | 78 | 86 | ||||||
Weighted-average life (in years) | 5.2 | 5.5 | ||||||
Weighted-average coupon | 4.0 | % | 4.0 | % |
Residential MSR uncertainties are hypothetical and should be used with caution. Changes in fair value based on variations in assumptions generally cannot be extrapolated because (i) the relationship of the change in an assumption to the change in fair value may not be linear and (ii) changes in one assumption may result in changes in another, which might magnify or counteract the uncertainties. The uncertainties do not reflect the effect of hedging activity undertaken by the Company to offset changes in the fair value of MSRs. See Note 16, “Derivative Financial Instruments,” for further information regarding these hedging activities.
Commercial Mortgage Servicing Rights
Income earned by the Company on its commercial mortgage servicing rights is derived primarily from contractually specified
servicing fees and other ancillary fees. The Company also earns income from subservicing certain third party commercial mortgages for which the Company does not record servicing rights. The following table presents the Company’s income earned from servicing commercial mortgages.
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Income from commercial mortgage servicing rights1 | $6 | $7 | ||||||
Income from subservicing third party commercial mortgages1 | 3 | 3 |
1 | Recognized in Commercial real estate related income in the Consolidated Statements of Income. |
The UPB of commercial mortgage loans serviced for third parties is presented in the following table:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
UPB of commercial mortgages subserviced for third parties | $29,195 | $28,140 | ||||||
UPB of loans underlying commercial mortgage servicing rights | 6,585 | 6,399 | ||||||
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| |||
Total UPB of commercial mortgages serviced for third parties | $35,780 | $34,539 | ||||||
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No commercial mortgage servicing rights were purchased or sold during the three months ended March 31, 2019 and 2018.
Commercial mortgage servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The Company calculates the fair value of commercial servicing rights based on the present value of estimated future net servicing income, considering prepayment projections and other assumptions. Impairment, if any, is recognized when the carrying value of the servicing asset exceeds the fair value at the measurement date. The amortized cost of the Company’s commercial mortgage servicing rights was $67 million and $66 million at March 31, 2019 and December 31, 2018, respectively.
A summary of the significant unobservable inputs used to estimate the fair value of the Company’s commercial mortgage servicing rights and the uncertainty of the fair values in response to 10% and 20% adverse changes in those inputs at the reporting date, are presented in the following table.
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Fair value of commercial mortgage servicing rights | $78 | $77 | ||||||
Discount rate (annual) | 12 | % | 12 | % | ||||
Decline in fair value from 10% adverse change | $3 | $3 | ||||||
Decline in fair value from 20% adverse change | 6 | 6 | ||||||
Prepayment rate assumption (annual) | 6 | % | 5 | % | ||||
Decline in fair value from 10% adverse change | $1 | $1 | ||||||
Decline in fair value from 20% adverse change | 2 | 2 | ||||||
Weighted-average life (in years) | 8.2 | 8.1 | ||||||
Float earnings rate (annual) | 1.1 | % | 1.1 | % |
Commercial mortgage servicing right uncertainties are hypothetical and should be used with caution.
26
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 9 - OTHER ASSETS
The components of other assets are presented in the following table:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Equity securities1: | ||||||||
Marketable equity securities: | ||||||||
Mutual fund investments | $65 | $79 | ||||||
Other equity | 20 | 16 | ||||||
Nonmarketable equity securities: | ||||||||
Federal Reserve Bank stock | 403 | 403 | ||||||
FHLB stock | 366 | 227 | ||||||
Other equity | 68 | 68 | ||||||
Tax credit investments2 | 1,767 | 1,722 | ||||||
Bank-owned life insurance | 1,636 | 1,627 | ||||||
Lease assets: | ||||||||
Operating leaseright-of-use assets3 | 1,164 | — | ||||||
Underlying lessor assets subject to operating leases, net3 | 1,146 | 1,205 | ||||||
Build-to-suit lease assets | 774 | 735 | ||||||
Accrued income | 1,163 | 1,106 | ||||||
Accounts receivable | 854 | 602 | ||||||
Pension assets, net | 479 | 484 | ||||||
Prepaid expenses | 251 | 231 | ||||||
OREO | 53 | 54 | ||||||
Other | 510 | 432 | ||||||
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| |||
Total other assets | $10,719 | $8,991 | ||||||
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1 | Does not include equity securities held for trading purposes classified as Trading assets and derivative instruments or Trading liabilities and derivative instruments on the Company’s Consolidated Balance Sheets. See Note 4, “Trading Assets and Liabilities and Derivative Instruments,” for more information. |
2 | See Note 11, “Certain Transfers of Financial Assets and Variable Interest Entities,” for additional information. |
3 | See Note 10, “Leases,” for additional information. |
Equity Securities Not Classified as Trading Assets or Liabilities
Equity securities with readily determinable fair values (marketable) that are not held for trading purposes are recorded at fair value and include mutual fund investments and other publicly traded equity securities.
Equity securities without readily determinable fair values (nonmarketable) that are not held for trading purposes include Federal Reserve Bank of Atlanta and FHLB of Atlanta capital stock, both held at cost, as well as other equity securities that the Company elected to account for under the measurement alternative. See Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K for additional information on the Company’s accounting policy for equity securities.
The following table summarizes net gains/(losses) on equity securities not classified as trading assets:
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Net gains on marketable equity securities1 | $4 | $1 | ||||||
Net gains/(losses) on nonmarketable equity securities: | ||||||||
Remeasurement losses and impairment | — | — | ||||||
Remeasurement gains1 | — | 23 | ||||||
Less: Net realized gains on sale | — | — | ||||||
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| |||
Total net unrealized gains onnon-trading equity securities | $4 | $24 | ||||||
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1 | Recognized in Other noninterest income in the Company’s Consolidated Statements of Income. |
Bank-Owned Life Insurance
Bank-owned life insurance consists of life insurance policies held on certain employees for which the Company is the beneficiary. These policies provide the Company an efficient form of funding for retirement and other employee benefits costs.
Build-to-Suit Lease Assets
Build-to-suit lease assets includes assets under construction associated with the Company’sbuild-to-suit leasing arrangements for clients. A direct financing lease, sales-type lease, or operating lease is created after construction of thebuild-to-suit lease asset is complete.
Accrued Income
Accrued income consists primarily of interest and other income accrued on the Company’s LHFI. Interest income on loans, except those classified as nonaccrual, is accrued based upon the outstanding principal amounts using the effective yield method. See Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K for information regarding the Company’s accounting policy for loans.
Accounts Receivable
Accounts receivable consists primarily of receivables from brokers, dealers, and customers related to pending loan trades, unsettled trades of securities, loan-related advances, and investment securities income due but not received. Accounts receivable also includes proceeds due from the FHA and the VA on foreclosed real estate related to loans that are insured by the FHA or guaranteed by the VA.
Pension Assets
Pension assets (net) represent the funded status of the Company’s overfunded pension and other postretirement benefits plans, measured as the difference between the fair value of plan assets and the benefit obligation at period end.
27
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 10 - LEASES
The Company adopted ASC Topic 842,Leases, on January 1, 2019 using a modified retrospective transition approach. As permitted by ASC 842, the Company elected not to reassess (i) whether any expired or existing contracts are leases or contain leases, (ii) the lease classification of any expired or existing leases, and (iii) the initial direct costs for existing leases.
Lessee Accounting
The Company’sright-of-use assets, lease liabilities, and associated balance sheet classifications are presented in the following table:
(Dollars in millions) | Classification | March 31, 2019 | ||||||
Assets: | ||||||||
Operating leaseright-of-use assets | Other assets | $1,164 | ||||||
Finance leaseright-of-use assets | Premises, property, and equipment, net | 14 | ||||||
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Totalright-of-use assets | $1,178 | |||||||
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Liabilities: | ||||||||
Operating leases | Other liabilities | $1,238 | ||||||
Finance leases | Long-term debt | 16 | ||||||
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Total lease liabilities | $1,254 | |||||||
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The Company leases certain assets, consisting primarily of real estate, and assesses at contract inception whether a contract is, or contains, a lease. Aright-of-use asset and lease liability is recorded on the balance sheet for all leases except those with an original lease term of twelve months or less.
The Company’s leases typically have lease terms between five years and ten years, with the longest lease term having an expiration date in 2081. Most of these leases include one or more renewal options for five years or less, and certain leases also include lessee termination options. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option, or reasonably certain not to exercise a termination option, by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of theright-of-use asset and lease liability.
The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest
rate implicit in a lease is not disclosed. Variable lease payments that are linked to a certain rate or index, such as the CPI, are included in the present value of lease payments and measured using the prevailing rate or index at lease commencement, with changes in the associated rate or index recognized in earnings during the period in which the change occurs. Theright-of-use asset and lease liability are not remeasured as a result of any subsequent change in the index or rate unless remeasurement is required for another reason. Variable lease payments that are not linked to a certain rate or index are comprised primarily of operating costs. The Company accounts for each separate lease component of a contract and its associatednon-lease components as a single lease component for all of its real estate leases.
At March 31, 2019, the Company had operating leases that had not yet commenced with undiscounted cash flows totaling less than $100 million. Leases that do not commence until a future date generally include executed ground and office space leases where construction is underway and the Company does not control the underlying asset during the construction.
The components of total lease cost and other supplemental lease information are presented in the following tables:
(Dollars in millions) | Three Months Ended March 31, 2019 | |||
Components of total lease cost: | ||||
Operating lease cost | $52 | |||
Finance lease cost: | ||||
Amortization ofright-of-use assets | 1 | |||
Variable lease cost | 8 | |||
Less: Sublease income | (1) | |||
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Total lease cost, net | $60 | |||
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Notes to Consolidated Financial Statements (Unaudited), continued
(Dollars in millions) | Three Months Ended March 31, 2019 | |||
Supplemental lease information | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $49 | |||
Financing cash flows from finance leases | 1 | |||
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Lease liabilities arising from obtainingright-of-use assets (subsequent to adoption): | ||||
Operating leases | 19 |
Weighted average remaining lease terms and discount rates are presented in the following table:
(Dollars in millions) | March 31, 2019 | |||
Weighted-average remaining lease term (in years): | ||||
Operating leases | 8.3 | |||
Finance leases | 4.6 | |||
Weighted-average discount rate (annual): | ||||
Operating leases | 3.3% | |||
Finance leases | 3.9 |
The following table presents a maturity analysis of the Company’s operating and finance lease liabilities at March 31, 2019:
(Dollars in millions) | Operating Leases | Finance Leases | Total | |||||||||
Year 1 | $185 | $5 | $190 | |||||||||
Year 2 | 191 | 3 | 194 | |||||||||
Year 3 | 180 | 3 | 183 | |||||||||
Year 4 | 163 | 4 | 167 | |||||||||
Year 5 | 142 | 1 | 143 | |||||||||
Thereafter | 573 | 1 | 574 | |||||||||
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Total lease payments | 1,434 | 17 | 1,451 | |||||||||
Less: Imputed interest | (196 | ) | (1 | ) | (197 | ) | ||||||
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Present value of lease liabilities | $1,238 | $16 | $1,254 | |||||||||
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Lessor Accounting
The Company’s two primary lessor businesses are equipment financing and structured real estate. In addition, the Company is the lessor in circumstances where a portion of its corporate owned real estate is leased to other tenants.
Payment terms are typically fixed; however, some agreements contain variable lease payments linked to an index or rate, such as the CPI or LIBOR. In certain agreements, lease payments increase based on a fixed percentage after a set duration of time. Variable lease payments that are based on an index or rate are included in the net lease investment for sales-type or direct financing leases, and are included in lease receivables for operating leases using the prevailing index or rate at lease commencement. The Company has elected to exclude its sales tax collection and remission activity from being reported as lease revenue with an associated expense.
The Company’s leases generally do not containnon-lease components. If a lease does containnon-lease components, the Company has elected not to separate lease andnon-lease components for each class of underlying asset in which it is the lessor, when the timing and patterns of revenue recognition for the components are the same, and the lease component, if
accounted for separately, would be classified as an operating lease.
Equipment Financing
The Company finances various types ofessential-use business equipment, such as transportation and construction equipment, under operating, sales-type, and direct financing leases. Lease terms are generally noncancelable and range between three years and fifteen years. Most lease agreements contain renewal options that range from one month to three years, and are generally reset at the effective fair market value at time of renewal. Certain lease agreements also include an option to purchase the lease asset at least twelve months prior to the end of the lease term.
The Company evaluates various inputs when estimating the amount it expects to derive from the underlying asset following the end of the lease term, including but not limited to, appraisals and inputs from third party sources, and historical portfolio experience. The Company manages residual risk on an individual lease basis, and in certain cases, obtains lessee residual value guarantees or enters into remarketing agreements in the event of lessee default or lease termination. The Company performs a
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Notes to Consolidated Financial Statements (Unaudited), continued
review of residual risk annually and obtains a third party appraisal for the majority of leased assets. At March 31, 2019, the carrying amount of residual assets covered by residual value guarantees was $110 million.
Structured Real Estate
The Company offers structured real estate arrangements, includingbuild-to-suit arrangements, whereby real property is leased to corporate clients under operating, sales-type, and direct financing leases. These leases typically have noncancelable terms that range between fifteen years and twenty years as well as multiple renewal options that can extend a lease up to an additional twenty years. These leases generally do not have termination or purchase options.
When a lease asset is acquired, the amount the Company expects to derive from the underlying asset is estimated using property appraisal values and assumptions regarding the economic life of the asset. The Company manages residual risk through continuous monitoring of the associated asset and credit quality of the lessee, which may include site visits to view the property and surrounding area. In certain cases, the Company may obtain third party residual value guarantees. In most instances, there are no lessee residual value guarantees. Assets are reviewed at least annually for impairment. At March 31, 2019, the carrying amount of residual assets covered by residual value guarantees was $29 million.
The components of total lease income are presented in the following table:
(Dollars in millions) | Three Months Ended March 31, 2019 | |||
Interest income from sales-type and direct financing leases | $37 | |||
Lease income relating to lease payments - operating leases | 53 | |||
Lease income relating to variable lease payments not included in the measurement of the lease receivable | 2 | |||
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Total lease income | $92 | |||
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Components of the Company’s net investment in sales-type and direct financing leases are presented in the following table:
(Dollars in millions) | March 31, 2019 | |||
Carrying amount of lease receivables | 3,900 | |||
Unguaranteed residual assets | 184 | |||
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Net investment in sales-type and direct financing lease assets1 | $4,084 | |||
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1 Included in Loans held for sale and Loans held for investment on the Company’s Consolidated Balance Sheets.
The following table presents a maturity analysis of the Company’s sales-type and direct financing lease receivables at March 31, 2019:
(Dollars in millions) | Sales-Type and Direct Financing Leases | |||
Year 1 | $805 | |||
Year 2 | 693 | |||
Year 3 | 663 | |||
Year 4 | 428 | |||
Year 5 | 352 | |||
Thereafter | 1,430 | |||
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Total lease receivables | 4,371 | |||
Less: Reconciling items1 | (471) | |||
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Present value of lease receivables | $3,900 | |||
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1 | Primarily comprised of interest and guaranteed residual assets. |
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Notes to Consolidated Financial Statements (Unaudited), continued
The following table presents a maturity analysis of the Company’s operating lease payments to be received at March 31, 2019:
(Dollars in millions) | Operating Leases | |||
Year 1 | $183 | |||
Year 2 | 162 | |||
Year 3 | 133 | |||
Year 4 | 105 | |||
Year 5 | 100 | |||
Thereafter | 287 | |||
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Total lease payments to be received | $970 | |||
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Underlying lessor assets subject to operating leases at March 31, 2019 consisted of the following:
(Dollars in millions) | Useful life (in years) | March 31, 2019 | ||||||
Underlying lessor assets subject to operating leases:1 | ||||||||
Real estate2 | 15 - 20 | $178 | ||||||
Equipment | 2 - 30 | 1,532 | ||||||
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Total underlying lessor assets subject to operating leases | 1,710 | |||||||
Less: Accumulated depreciation and amortization | (564 | ) | ||||||
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Underlying lessor assets subject to operating leases, net3 | $1,146 | |||||||
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1 | Excludes owned assets subject to operating leases that are held and used by the Company and which are included in Premises, property, and equipment, net, on the Company’s Consolidated Balance Sheets. |
2 | Includes certain land assets subject to operating leases that have indefinite lives. |
3 | Included in Other Assets on the Company’s Consolidated Balance Sheets. |
Depreciation expense on underlying assets subject to operating leases for the three months ended March 31, 2019 totaled $36 million.
NOTE 11 - CERTAIN TRANSFERS OF FINANCIAL ASSETS AND VARIABLE INTEREST ENTITIES
The Company has transferred loans and securities in sale or securitization transactions for which the Company retains certain beneficial interests, servicing rights, and/or recourse. These transfers of financial assets include certain residential mortgage loans, guaranteed student loans, and commercial loans, as discussed in the following section, “Transfers of Financial Assets.” Cash receipts on beneficial interests held related to these transfers were immaterial for both the three months ended March 31, 2019 and 2018.
When a transfer or other transaction occurs with a VIE, the Company first determines whether it has a VI in the VIE. A VI is typically in the form of securities representing retained interests in transferred assets and, at times, servicing rights, and for commercial mortgage loans sold to Fannie Mae, the loss share guarantee. See Note 15, “Guarantees,” for further discussion of the Company’s loss share guarantee. When determining whether to consolidate the VIE, the Company evaluates whether it is a primary beneficiary which has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE, and (ii) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.
To determine whether a transfer should be accounted for as a sale or a secured borrowing, the Company evaluates whether: (i) the transferred assets are legally isolated, (ii) the transferee has the right to pledge or exchange the transferred assets, and
(iii) the Company has relinquished effective control of the transferred assets. If all three conditions are met, then the transfer is accounted for as a sale.
Except as specifically noted herein, the Company is not required to provide additional financial support to any of the entities to which the Company has transferred financial assets, nor has the Company provided any support it was not otherwise obligated to provide. No events occurred during the three months ended March 31, 2019 that changed the Company’s previous conclusions regarding whether it is the primary beneficiary of the VIEs described herein. Furthermore, no events occurred during the three months ended March 31, 2019 that changed the Company’s sale conclusion with regards to previously transferred residential mortgage loans, guaranteed student loans, or commercial loans.
Transfers of Financial Assets
The following discussion summarizes transfers of financial assets to entities for which the Company has retained some level of continuing involvement.
Consumer Loans
Residential Mortgage Loans
The Company typically transfers first lien residential mortgage loans in conjunction with Ginnie Mae, Fannie Mae, and Freddie Mac securitization transactions, whereby the loans are
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Notes to Consolidated Financial Statements (Unaudited), continued
exchanged for cash or securities that are readily redeemable for cash, and servicing rights are retained.
The Company sold residential mortgage loans to Ginnie Mae, Fannie Mae, and Freddie Mac, which resulted inpre-tax net gains of $49 million andpre-tax net losses of $13 million for the three months ended March 31, 2019 and 2018, respectively. Net gains/losses on the sale of residential mortgage LHFS are recorded at inception of the associated IRLCs and reflect the change in value of the loans resulting from changes in interest rates from the time the Company enters into the related IRLCs with borrowers until the loans are sold, but do not include the results of hedging activities initiated by the Company to mitigate this market risk. See Note 16, “Derivative Financial Instruments,” for further discussion of the Company’s hedging activities. The Company has made certain representations and warranties with respect to the transfer of these loans. See Note 15, “Guarantees,” for additional information regarding representations and warranties.
Guaranteed Student Loans
The Company has securitized government-guaranteed student loans through a transfer of loans to a securitization entity and retained the residual interest in the entity. The Company concluded that this entity should be consolidated because the Company has (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses, and the right to receive benefits, that could potentially be significant. At March 31, 2019 and December 31, 2018, the Company’s Consolidated Balance Sheets reflected $159 million and $165 million of assets held by the securitization entity and $156 million and $161 million of debt issued by the entity, respectively, inclusive of related accrued interest.
To the extent that the securitization entity incurs losses on its assets, the securitization entity has recourse to the guarantor
of the underlying loan, which is backed by the Department of Education up to a maximum guarantee of 98%, or in the event of death, disability, or bankruptcy, 100%. When not fully guaranteed, losses reduce the amount of available cash payable to the Company as the owner of the residual interest. To the extent that losses result from a breach of servicing responsibilities, the Company, which functions as the master servicer, may be required to repurchase the defaulted loan(s) at par value. If the breach was caused by the subservicer, the Company would seek reimbursement from the subservicer up to the guaranteed amount. The Company’s maximum exposure to loss related to the securitization entity would arise from a breach of its servicing responsibilities. To date, loss claims filed with the guarantor that have been denied due to servicing errors have either been, or are in the process of being cured, or reimbursement has been provided to the Company by the subservicer, or in limited cases, absorbed by the Company.
Commercial Loans
The Company originates and sells certain commercial mortgage loans to Fannie Mae and Freddie Mac, originates FHA insured loans, and issues and sells Ginnie Mae commercial MBS secured by FHA insured loans. The Company transferred commercial loans to these Agencies and GSEs, which resulted inpre-tax net gains of $7 million and $9 million for the three months ended March 31, 2019 and 2018, respectively. The loans are exchanged for cash or securities that are readily redeemable for cash, with servicing rights retained. The Company has made certain representations and warranties with respect to the transfer of these loans and has entered into a loss share guarantee related to certain loans transferred to Fannie Mae. See Note 15, “Guarantees,” for additional information regarding the commercial mortgage loan loss share guarantee.
The Company’s total managed loans, including the LHFI portfolio and other transferred loans (securitized and unsecuritized), are presented in the following table by portfolio balance and delinquency status (accruing loans 90 days or more past due and all nonaccrual loans) at March 31, 2019 and December 31, 2018, as well as the related net charge-offs for the three months ended March 31, 2019 and 2018.
Portfolio Balance | Past Due and Nonaccrual | Net Charge-offs | ||||||||||||||||||||||
Three Months Ended March 31 | ||||||||||||||||||||||||
(Dollars in millions) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | 2019 | 2018 | ||||||||||||||||||
LHFI portfolio: | ||||||||||||||||||||||||
Commercial | $83,729 | $80,940 | $215 | $175 | $28 | $17 | ||||||||||||||||||
Consumer | 71,504 | 70,899 | 1,966 | 2,003 | 69 | 62 | ||||||||||||||||||
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Total LHFI portfolio | 155,233 | 151,839 | 2,181 | 2,178 | 97 | 79 | ||||||||||||||||||
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Managed securitized loans: | ||||||||||||||||||||||||
Commercial1 | 6,585 | 6,399 | — | — | — | — | ||||||||||||||||||
Consumer | 138,299 | 139,809 | 148 | 146 | — | 2 | 2 | 2 | ||||||||||||||||
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Total managed securitized loans | 144,884 | 146,208 | 148 | 146 | — | 2 | ||||||||||||||||||
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Managed unsecuritized loans3 | 607 | 1,134 | 79 | 152 | — | — | ||||||||||||||||||
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Total managed loans | $300,724 | $299,181 | $2,408 | $2,476 | $97 | $81 | ||||||||||||||||||
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1 | Comprised of commercial mortgages sold through Fannie Mae, Freddie Mac, and Ginnie Mae securitizations, whereby servicing has been retained by the Company. |
2 | Amounts associated with $347 million and $387 million of managed securitized loans at March 31, 2019 and December 31, 2018, respectively. Netcharge-off data is not reported to the Company for the remaining balance of $138.0 billion and $139.4 billion of managed securitized loans at March 31, 2019 and December 31, 2018, respectively. |
3 | Comprised of unsecuritized loans the Company originated and sold to private investors with servicing rights retained. Net charge-offs on these loans are not presented in the table as the data is not reported to the Company by the private investors that own these related loans. |
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Notes to Consolidated Financial Statements (Unaudited), continued
Other Variable Interest Entities
In addition to exposure to VIEs arising from transfers of financial assets, the Company also has involvement with VIEs from other business activities.
Tax Credit Investments
The following table presents information related to the Company’s investments in tax credit VIEs that it does not consolidate:
Community Development Investments | Renewable Energy Partnerships | |||||||||||||||
(Dollars in millions) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | ||||||||||||
Carrying value of investments1 | $1,686 | $1,636 | $81 | $86 | ||||||||||||
Maximum exposure to loss related to investments2 | 2,262 | 2,207 | 81 | 138 |
1 | At March 31, 2019 and December 31, 2018, the carrying value of community development investments excludes $69 million and $68 million of investments in funds that do not qualify for tax credits, respectively. |
2 | At March 31, 2019 and December 31, 2018, the Company’s maximum exposure to loss related to community development investments includes $503 million and $422 million of loans and $579 million and $639 million of unfunded equity commitments, respectively. At March 31, 2019 and December 31, 2018, the Company’s maximum exposure to loss related to renewable energy partnerships includes $0 and $52 million of unfunded equity commitments, respectively. |
Community Development Investments
The Company invests in multi-family affordable housing partnership developments and other community development entities as a limited partner and/or a lender. The carrying value of these investments is recorded in Other assets on the Company’s Consolidated Balance Sheets. The Company receives tax credits for its limited partner investments, which are recorded in Provision for income taxes in the Company’s Consolidated Statements of Income. Amortization recognized on qualified affordable housing partnerships is recorded in the Provision for income taxes, net of the related tax benefits, in the Company’s Consolidated Statements of Income. Amortization recognized on other community development investments is recorded in Amortization in the Company’s Consolidated Statements of Income. The Company has determined that the majority of the related partnerships are VIEs.
The Company has concluded that it is not the primary beneficiary of these investments when it invests as a limited partner and there is a third party general partner. The general partner, or an affiliate of the general partner, often provides guarantees to the limited partner, which protects the Company from construction and operating losses and tax credit allocation deficits. The Company’s maximum exposure to loss would result from the loss of its limited partner investments, net of liabilities, along with loans or interest rate swap exposures related to these investments as well as unfunded equity commitments that the Company is required to fund if certain conditions are met.
The following table presents tax credits and amortization associated with the Company’s investments in community development investments:
Tax Credits | Amortization | |||||||||||||||
Three Months Ended March 31 | Three Months Ended March 31 | |||||||||||||||
(Dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Qualified affordable housing partnerships | $33 | $30 | $35 | $32 | ||||||||||||
Other community development investments | 18 | 18 | 15 | 14 |
Renewable Energy Partnerships
In the second quarter of 2018, the Company began investing in entities that promote renewable energy sources as a limited partner. The carrying value of these renewable energy partnership investments is recorded in Other assets on the Company’s Consolidated Balance Sheets, and the associated tax credits received for these investments are recorded as a reduction to the carrying value of these investments. The Company has determined that these renewable energy tax credit partnerships are VIEs.
The Company has concluded that it is not the primary beneficiary of these VIEs because it does not have the power to direct the activities that most significantly impact the VIEs’ financial performance and therefore, it is not required to consolidate these VIEs. The Company’s maximum exposure to loss related to these investments is comprised of its equity investments in these partnerships and any additional unfunded equity commitments.
Total Return Swaps
At March 31, 2019 and December 31, 2018, the outstanding notional amount of the Company’sVIE-facing TRS contracts totaled $2.2 billion and $2.0 billion, and related loans outstanding to VIEs totaled $2.2 billion and $2.0 billion, respectively. These financings were measured at fair value and classified within Trading assets and derivative instruments on the Consolidated Balance Sheets. The Company entered into client-facing TRS contracts of the same outstanding notional amounts. The notional amounts of the TRS contracts with VIEs represent the Company’s maximum exposure to loss, although this exposure has been mitigated via the TRS contracts with clients. For additional information on the Company’s TRS contracts and its involvement with these VIEs, see Note 16, “Derivative Financial Instruments,” as well as Note 12, “Certain Transfers of Financial Assets and Variable Interest Entities,” to the Company’s 2018 Annual Report on Form10-K.
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Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 12 – NET INCOME PER COMMON SHARE
Reconciliations of net income to net income available to common shareholders and average basic common shares outstanding to
average diluted common shares outstanding are presented in the following table.
Three Months Ended March 31 | ||||||||
(Dollars and shares in millions, except per share data) | 2019 | 2018 | ||||||
Net income | $580 | $643 | ||||||
Less: | ||||||||
Preferred stock dividends | (26 | ) | (31 | ) | ||||
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Net income available to common shareholders | $554 | $612 | ||||||
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Average common shares outstanding - basic | 443.6 | 468.7 | ||||||
Add dilutive securities: | ||||||||
RSUs | 2.6 | 2.8 | ||||||
Common stock warrants, options, and restricted stock | 0.5 | 2.1 | ||||||
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Average common shares outstanding - diluted | 446.7 | 473.6 | ||||||
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Net income per average common share - diluted | $1.24 | $1.29 | ||||||
Net income per average common share - basic | 1.25 | 1.31 |
NOTE 13 - INCOME TAXES
For the three months ended March 31, 2019 and 2018, the provision for income taxes was $104 million and $147 million, representing effective tax rates of 15% and 19%, respectively. The effective tax rate for the three months ended March 31, 2019 was favorably impacted by $17 million of net discrete income tax benefits related primarily to stock-based compensation and state income taxtrue-ups, while the effective tax rate for the three months ended March 31, 2018 was favorably impacted by $4 million of net discrete income tax benefits.
The provision for income taxes includes both federal and state income taxes and differs from the provision using statutory rates due primarily to favorable permanent tax items such as interest income from lending totax-exempt entities, tax credits, and amortization expense related to qualified affordable housing investment costs. The Company calculated the provision for income taxes by applying the estimated annual effective tax rate toyear-to-datepre-tax income and adjusting for discrete items that occurred during the period.
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Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company sponsors various compensation and benefit programs to attract and retain talent. Aligned with a pay for performance culture, the Company’s plans and programs include short-term incentives, AIP, and various LTI plans. See Note 17,
“Employee Benefit Plans,” to the Company’s 2018 Annual Report on Form10-K for additional information regarding the Company’s employee benefit plans.
Stock-based compensation expense recognized in Employee compensation in the Consolidated Statements of Income consisted of the following:
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
RSUs | $25 | $39 | ||||||
Phantom stock units1 | 12 | 17 | ||||||
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Total stock-based compensation expense | $37 | $56 | ||||||
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Stock-based compensation tax benefit2 | $9 | $13 |
1 | Phantom stock units are settled in cash. The Company paid $44 million and $75 million during the three months ended March 31, 2019 and 2018, respectively, related to these share-based liabilities. |
2 | Does not include excess tax benefits or deficiencies recognized in the Provision for income taxes in the Consolidated Statements of Income. |
Components of net periodic benefit related to the Company’s pension and other postretirement benefits plans are presented in the following table and are recognized in Employee benefits in the Consolidated Statements of Income:
Three Months Ended March 31 | ||||||||||||||||
Pension Benefits 1 | Other Postretirement Benefits | |||||||||||||||
(Dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Service cost | $1 | $1 | $— | $— | ||||||||||||
Interest cost | 24 | 23 | — | — | ||||||||||||
Expected return on plan assets | (37 | ) | (47 | ) | (1 | ) | (1 | ) | ||||||||
Amortization of prior service credit | — | — | (2 | ) | (2 | ) | ||||||||||
Amortization of actuarial loss | 6 | 6 | — | — | ||||||||||||
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Net periodic benefit | ($6 | ) | ($17 | ) | ($3 | ) | ($3 | ) | ||||||||
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1 Administrative fees are recognized in service cost for each of the periods presented.
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Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 15 – GUARANTEES
The Company has undertaken certain guarantee obligations in the ordinary course of business. The issuance of a guarantee imposes an obligation for the Company to stand ready to perform and make future payments should certain triggering events occur. Payments may be in the form of cash, financial instruments, other assets, shares of stock, or through provision of the Company’s services. The following is a discussion of the guarantees that the Company has issued at March 31, 2019. The Company has also entered into certain contracts that are similar to guarantees, but that are accounted for as derivative instruments as discussed in Note 16, “Derivative Financial Instruments.”
Letters of Credit
Letters of credit are conditional commitments issued by the Company, generally to guarantee the performance of a client to a third party in borrowing arrangements, such as CP, bond financing, or similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients but may be reduced by selling participations to third parties. The Company issues letters of credit that are classified as financial standby, performance standby, or commercial letters of credit; however, commercial letters of credit are considered guarantees of funding and are not subject to the disclosure requirements of guarantee obligations.
At March 31, 2019 and December 31, 2018, the maximum potential exposure to loss related to the Company’s issued letters of credit was $2.8 billion and $2.9 billion, respectively. The Company’s outstanding letters of credit generally have a term of more than one year. Some standby letters of credit are designed to be drawn upon in the normal course of business and others are drawn upon only in circumstances of dispute or default in the underlying transaction to which the Company is not a party. In all cases, the Company is entitled to reimbursement from the client. If a letter of credit is drawn upon and reimbursement is not provided by the client, the Company may take possession of the collateral securing the letter of credit, where applicable.
The Company monitors its credit exposure under standby letters of credit in the same manner as it monitors other extensions of credit in accordance with its credit policies. Consistent with the methodologies used for all commercial borrowers, an internal assessment of the PD and loss severity in the event of default is performed. The Company’s credit risk management for letters of credit leverages the risk rating process to focus greater visibility on higher risk and higher dollar letters of credit. The allowance associated with letters of credit is a component of the unfunded commitments reserve recorded in Other liabilities on the Consolidated Balance Sheets and is included in the allowance for credit losses as disclosed in Note 7, “Allowance for Credit Losses.” Additionally, unearned fees relating to letters of credit are recorded in Other liabilities on the Consolidated Balance Sheets. The net carrying amount of unearned fees was immaterial at both March 31, 2019 and December 31, 2018.
Loan Sales and Servicing
The Company originates and purchases residential mortgage loans, a portion of which are sold to outside investors in the normal course of business through a combination of whole loan sales to GSEs, Ginnie Mae, andnon-agency investors. The Company also originates and sells certain commercial mortgage loans to Fannie Mae and Freddie Mac, originates FHA insured loans, and issues and sells Ginnie Mae commercial MBS secured by FHA insured loans.
When loans are sold, representations and warranties regarding certain attributes of the loans are made to third party purchasers. Subsequent to the sale, if a material underwriting deficiency or documentation defect is discovered, the Company may be obligated to repurchase the loan or to reimburse an investor for losses incurred (make whole requests), if such deficiency or defect cannot be cured by the Company within the specified period following discovery. These representations and warranties may extend through the life of the loan. In addition to representations and warranties related to loan sales, the Company makes representations and warranties that it will service the loans in accordance with investor servicing guidelines and standards, which may include (i) collection and remittance of principal and interest, (ii) administration of escrow for taxes and insurance, (iii) advancing principal, interest, taxes, insurance, and collection expenses on delinquent accounts, and (iv) loss mitigation strategies, including loan modifications and foreclosures.
The following table summarizes the changes in the Company’s reserve for residential mortgage loan repurchases:
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Balance, beginning of period | $26 | $39 | ||||||
Repurchase (benefit)/provision | (2) | — | ||||||
|
|
|
|
| ||||
Balance, end of period | $24 | $39 | ||||||
|
|
|
|
|
A significant degree of judgment is used to estimate the mortgage repurchase liability as the estimation process is inherently uncertain and subject to imprecision. The Company believes that its reserve appropriately estimates incurred losses based on its current analysis and assumptions. While the mortgage repurchase reserve includes the estimated cost of settling claims related to required repurchases, the Company’s estimate of losses depends on its assumptions regarding GSE and other counterparty behavior, loan performance, home prices, and other factors. The liability is recorded in Other liabilities on the Consolidated Balance Sheets, and the related repurchase (benefit)/provision is recognized in Mortgage related income in the Consolidated Statements of Income. See Note 18, “Contingencies,” for additional information on current legal matters related to loan sales.
36
Notes to Consolidated Financial Statements (Unaudited), continued
The following table summarizes the carrying value of the Company’s outstanding repurchased residential mortgage loans:
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||||
Outstanding repurchased residential mortgage loans: |
| |||||||
Performing LHFI | $181 | $183 | ||||||
Nonperforming LHFI | 12 | 16 | ||||||
|
|
|
|
|
| |||
Total carrying value of outstanding repurchased residential mortgages | $193 | $199 | ||||||
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|
|
|
Residential mortgage loans sold to Ginnie Mae are insured by the FHA or are guaranteed by the VA. As servicer, the Company may elect to repurchase delinquent loans in accordance with Ginnie Mae guidelines; however, the loans continue to be insured. The Company may also indemnify the FHA and VA for losses related to loans not originated in accordance with their guidelines.
Commercial Mortgage Loan Loss Share Guarantee
In connection with the acquisition of Pillar, the Company assumed a loss share obligation associated with the terms of a master loss sharing agreement with Fannie Mae for multi-family commercial mortgage loans that were sold by Pillar to Fannie Mae under Fannie Mae’s delegated underwriting and servicing program. Upon the acquisition of Pillar, the Company entered into a lender contract amendment with Fannie Mae for multi-family commercial mortgage loans that Pillar sold to Fannie Mae prior to acquisition and that the Company sold to Fannie Mae subsequent to acquisition, whereby the Company bears a risk of loss of up toone-third of the incurred losses resulting from borrower defaults. The breach of any representation or warranty related to a loan sold to Fannie Mae could increase the Company’s level of risk-sharing associated with the loan. The outstanding UPB of loans sold subject to the loss share guarantee was $3.6 billion and $3.5 billion at March 31, 2019 and December 31, 2018, respectively. The maximum potential exposure to loss was $1.1 billion and $1.0 billion at March 31, 2019 and December 31, 2018, respectively. Using probability of default and severity of loss estimates, the Company’s loss share liability was $6 million and $5 million at March 31, 2019 and December 31, 2018, respectively, and is recorded in Other liabilities on the Consolidated Balance Sheets.
Visa
The Company executes credit and debit transactions through Visa and Mastercard. The Company is a defendant, along with Visa and Mastercard (the “Card Associations”), as well as other banks, in one of several antitrust lawsuits challenging the practices of the Card Associations (the “Litigation”). The Company entered into judgment and loss sharing agreements with Visa and certain other banks in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to the Litigation. Additionally, in connection with Visa’s restructuring in 2007, shares of Visa common stock were issued to its financial institution members and the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. upon completion of Visa’s IPO in
2008. A provision of the original VisaBy-Laws, which was restated in Visa’s certificate of incorporation, contains a general indemnification provision between a Visa member and Visa that explicitly provides that each member’s indemnification obligation is limited to losses arising from its own conduct and the specifically defined Litigation. While the district court approved a class action settlement of the Litigation in 2012 that settled the claims of both a damages class and an injunctive relief class, the U.S. Court of Appeals for the Second Circuit reversed the district court’s approval of the settlement on June 30, 2016. The U.S. Supreme Court denied plaintiffs’ petition for certiorari on March 27, 2017, and the case returned to the district court for further action. Since being remanded to the district court, plaintiffs have pursued two separate class actions—one class action seeking damages that names, among others, the Company as a defendant, and one class action seeking injunctive relief that does not name the Company as a defendant, but for which the Company could bear some responsibility under the judgment and loss sharing agreement described above. An agreement to resolve the claims was reached and the settlement was preliminarily approved by the district court on January 24, 2019.
Agreements associated with Visa’s IPO have provisions that Visa will fund a litigation escrow account, established for the purpose of funding judgments in, or settlements of, the Litigation. If the escrow account is insufficient to cover the Litigation losses, then Visa will issue additional Class A shares (“loss shares”). The proceeds from the sale of the loss shares would then be deposited in the escrow account. The issuance of the loss shares will cause a dilution of Visa’s Class B shares as a result of an adjustment to lower the conversion factor of the Class B shares to Class A shares. Visa U.S.A.’s members are responsible for any portion of the settlement or loss on the Litigation after the escrow account is depleted and the value of the Class B shares is fully diluted.
In May 2009, the Company sold its 3.2 million Class B shares to the Visa Counterparty and entered into a derivative with the Visa Counterparty. Under the derivative, the Visa Counterparty is compensated by the Company for any decline in the conversion factor as a result of the outcome of the Litigation. Conversely, the Company is compensated by the Visa Counterparty for any increase in the conversion factor. The amount of payments made or received under the derivative is a function of the 3.2 million shares sold to the Visa Counterparty, the change in conversion rate, and Visa’s share price. The Visa Counterparty, as a result of its ownership of the Class B shares, is impacted by dilutive adjustments to the conversion factor of the Class B shares caused by the Litigation losses. Additionally, the Company will make periodic payments based on the notional of the derivative and a fixed rate until the date on which the Litigation is settled. The fair value of the derivative is estimated based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios and the timing of the resolution of the Litigation. The fair value of the derivative liability was $7 million at both March 31, 2019 and December 31, 2018. The fair value of the derivative is estimated based on the Company’s expectations regarding the resolution of the Litigation. The ultimate impact to the Company could be significantly different based on the Litigation outcome.
37
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into various derivative financial instruments, both in a dealer capacity to facilitate client transactions and as an end user as a risk management tool. The Company generally manages the risk associated with these derivatives within the established MRM and credit risk management frameworks. Derivatives may be used by the Company to hedge various economic or client-related exposures. In such instances, derivative positions are typically monitored using a VAR methodology, with exposures reviewed daily. Derivatives are also used as a risk management tool to hedge the Company’s balance sheet exposure to changes in identified cash flow and fair value risks, either economically or in accordance with hedge accounting provisions. The Company’s Corporate Treasury function is responsible for employing the various hedge strategies to manage these objectives. The Company enters into IRLCs on residential and commercial mortgage loans that are accounted for as freestanding derivatives. Additionally, certain contracts containing embedded derivatives are measured, in their entirety, at fair value. All derivatives, including both freestanding and any embedded derivatives that the Company bifurcates from the host contracts, are measured at fair value in the Consolidated Balance Sheets in Trading assets and derivative instruments and Trading liabilities and derivative instruments. The associated gains and losses are either recognized in AOCI, net of tax, or within the Consolidated Statements of Income, depending upon the use and designation of the derivatives.
Credit and Market Risk Associated with Derivative Instruments
Derivatives expose the Company to risk that the counterparty to the derivative contract does not perform as expected. The Company manages its exposure to counterparty credit risk associated with derivatives by entering into transactions with counterparties with defined exposure limits based on their credit quality and in accordance with established policies and procedures. All counterparties are reviewed regularly as part of the Company’s credit risk management practices and appropriate action is taken to adjust the exposure limits to certain counterparties as necessary. The Company’s derivative transactions are generally governed by ISDA agreements or other legally enforceable industry standard master netting agreements. In certain cases and depending on the nature of the underlying derivative transactions, bilateral collateral agreements are also utilized. Furthermore, the Company and its subsidiaries are subject to OTC derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses, such as LCH and the CME. These clearing houses require the Company to post initial and variation margin to mitigate the risk ofnon-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. Effective January 3, 2017, the CME amended its rulebook to legally characterize variation margin cash payments for cleared OTC derivatives as settlement rather than as collateral. Consistent with the CME’s amended requirements, LCH amended its rulebook effective January 16, 2018, to legally characterize variation margin cash payments for cleared OTC derivatives as settlement rather than as collateral. As a result, in the first quarter of 2018, the Company began reducing the corresponding derivative asset and liability balances for LCH -
cleared OTC derivatives to reflect the settlement of those positions via the exchange of variation margin.
When the Company has more than one outstanding derivative transaction with a single counterparty, and there exists a legal right of offset with that counterparty, the Company considers its exposure to the counterparty to be the net fair value of its derivative positions with that counterparty. If the net fair value is positive, then the corresponding asset value also reflects cash collateral held. At March 31, 2019, the economic exposure of these net derivative asset positions was $736 million, reflecting $1.1 billion of net derivative gains, adjusted for cash and other collateral of $404 million that the Company held in relation to these positions. At December 31, 2018, the economic exposure of net derivative asset positions was $541 million, reflecting $891 million of net derivative gains, adjusted for cash and other collateral held of $350 million.
Derivatives also expose the Company to market risk arising from the adverse effects that changes in market factors, such as interest rates, currency rates, equity prices, commodity prices, or implied volatility, may have on the value of the Company’s derivatives. The Company manages this risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. The Company measures its market risk exposure using a VAR methodology for derivatives designated as trading instruments. Other tools and risk measures are also used to actively manage risk associated with derivatives including scenario analysis and stress testing.
Derivative instruments are priced using observable market inputs at amid-market valuation point and take into consideration appropriate valuation adjustments for collateral, market liquidity, and counterparty credit risk. For purposes of determining fair value adjustments to its OTC derivative positions, the Company takes into consideration the credit profile and likelihood of default by counterparties, the CVA, the Company’s own credit risk, the DVA, as well as the Company’s net exposure, which considers legally enforceable master netting agreements and collateral along with remaining maturities. In determining the CVA, the expected loss of each counterparty is estimated using market-based views of counterparty default probabilities observed in the single-name CDS market, when available and of sufficient liquidity. When single-name CDS market data is not available or not of sufficient liquidity, the probability of default is estimated using a combination of the Company’s internal risk rating system and sector/rating based CDS data. For purposes of estimating the Company’s own credit risk on derivative liability positions, the DVA, the Company uses probabilities of default from observable, sector/rating based CDS data. For additional information on the Company’s fair value measurements, see Note 17, “Fair Value Election and Measurement.”
Currently, the industry standard master netting agreements governing the majority of the Company’s derivative transactions with counterparties contain bilateral events of default and acceleration provisions related to the creditworthiness of the Bank and the counterparty. Should the Bank be in default under any of these provisions, the Bank’s counterparties would be permitted to close out transactions with the Bank on a net basis, at amounts that would approximate the fair values of the
38
Notes to Consolidated Financial Statements (Unaudited), continued
derivatives, resulting in a single sum due by one party to the other. The counterparties would have the right to apply any collateral posted by the Bank against any net amount owed by the Bank. Additionally, certain of the Company’s derivative liability positions, totaling $1.3 billion and $589 million in fair value at March 31, 2019 and December 31, 2018, respectively, contain provisions conditioned on downgrades of the Bank’s credit rating. These provisions, if triggered, would either give rise to an ATE that permits the counterparties toclose-out net and apply collateral or, where a CSA is present, require the Bank to post additional collateral.
At March 31, 2019, the Bank held senior long-term debt credit ratings of Baal /A- /A- from Moody’s, S&P, and Fitch, respectively. At March 31, 2019, ATE s have been triggered for less than $1 million in fair value liabilities. The maximum additional liability that could be triggered from ATE s was approximately $13 million at March 31, 2019. At March 31, 2019, $1.3 billion in fair value of derivative liabilities were subject to CSA s, against which the Bank has posted $786 million in collateral, primarily in the form of cash. Pursuant to the terms of the CSA, the Bank would be required to post additional
collateral of approximately $1 million against these contracts if the Bank were downgraded to Baa2/BBB+. Further downgrades to Baa3/BBB andBa1/BBB- would require the Bank to post an additional $2 million and $7 million of collateral, respectively. Any downgrades below Ba2/BB+ do not contain predetermined collateral posting levels.
Notional and Fair Value of Derivative Positions
The following table presents the Company’s derivative positions at March 31, 2019 and December 31, 2018. The notional amounts in the table are presented on a gross basis at March 31, 2019 and December 31, 2018. Gross positive and gross negative fair value amounts associated with respective notional amounts are presented without consideration of any netting agreements, including collateral arrangements. Net fair value derivative amounts are adjusted on an aggregate basis, where applicable, to take into consideration the effects of legally enforceable master netting agreements, including any cash collateral received or paid, and are recognized in Trading assets and derivative instruments or Trading liabilities and derivative instruments on the Consolidated Balance Sheets.
39
Notes to Consolidated Financial Statements (Unaudited), continued
March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
(Dollars in millions) | Notional Amounts | Asset Derivatives | Liability Derivatives | Notional Amounts | Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Derivative instruments designated in hedging relationships |
| |||||||||||||||||||||||
Cash flow hedges:1 | ||||||||||||||||||||||||
Interest rate contracts hedging floating rate LHFI | $9,775 | $1 | $2 | $10,500 | $1 | $2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Subtotal | 9,775 | 1 | 2 | 10,500 | 1 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fair value hedges:2 | ||||||||||||||||||||||||
Interest rate contracts hedging fixed rate debt | 10,305 | 2 | 1 | 9,550 | 1 | 1 | ||||||||||||||||||
Interest rate contracts hedging brokered time deposits | — | — | — | 59 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Subtotal | 10,305 | 2 | 1 | 9,609 | 1 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| ||||||||||||||||||||||||
Derivative instruments not designated as hedging instruments3 |
| |||||||||||||||||||||||
Interest rate contracts hedging: | ||||||||||||||||||||||||
Residential MSRs4 | 37,832 | 70 | 10 | 28,011 | 54 | 10 | ||||||||||||||||||
LHFS, IRLCs5 | 3,049 | 6 | 20 | 4,891 | 18 | 38 | ||||||||||||||||||
LHFI | 183 | — | — | 159 | — | — | ||||||||||||||||||
Trading activity6 | 128,285 | 959 | 604 | 127,286 | 771 | 687 | ||||||||||||||||||
Foreign exchange rate contracts hedging loans and trading activity | 9,089 | 112 | 102 | 9,824 | 129 | 119 | ||||||||||||||||||
Credit contracts hedging: | ||||||||||||||||||||||||
LHFI | 927 | — | 23 | 830 | — | 14 | ||||||||||||||||||
Trading activity7 | 4,434 | 37 | 34 | 4,058 | 97 | 95 | ||||||||||||||||||
Equity contracts hedging trading activity6 | 34,301 | 1,873 | 1,953 | 34,471 | 1,447 | 1,644 | ||||||||||||||||||
Other contracts: | ||||||||||||||||||||||||
IRLCs and other8 | 1,829 | 23 | 11 | 1,393 | 20 | 15 | ||||||||||||||||||
Commodity derivatives | 2,078 | 45 | 44 | 2,020 | 93 | 91 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Subtotal | 222,007 | 3,125 | 2,801 | 212,943 | 2,629 | 2,713 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total derivative instruments | $242,087 | $3,128 | $2,804 | $233,052 | $2,631 | $2,716 | ||||||||||||||||||
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|
| |||||||
Total gross derivative instruments (before netting) | $3,128 | $2,804 | $2,631 | $2,716 | ||||||||||||||||||||
Less: Legally enforceable master netting agreements | (1,709 | ) | (1,709 | ) | (1,654 | ) | (1,654 | ) | ||||||||||||||||
Less: Cash collateral received/paid | (391 | ) | (831 | ) | (338 | ) | (652 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total derivative instruments (after netting) | $1,028 | $264 | $639 | $410 | ||||||||||||||||||||
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|
|
|
|
|
|
|
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|
|
1 | See “Cash Flow Hedging” in this Note for further discussion. |
2 | See “Fair Value Hedging” in this Note for further discussion. |
3 | See “Economic Hedging Instruments and Trading Activities” in this Note for further discussion. |
4 | Notional amounts include $1.9 billion and $921 million related to interest rate futures at March 31, 2019 and December 31, 2018, respectively. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table. |
5 | Notional amounts include $65 million and $116 million related to interest rate futures at March 31, 2019 and December 31, 2018, respectively. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table. |
6 | Notional amounts include $1.5 billion and $1.2 billion related to interest rate futures at March 31, 2019 and December 31, 2018, and $268 million and $136 million related to equity futures at March 31, 2019 and December 31, 2018, respectively. These futures contracts settle in cash daily, one day in arrears. The derivative asset or liability associated with the one day lag is included in the fair value column of this table. Notional amounts also include amounts related to interest rate swaps hedging fixed rate debt. |
7 | Notional amounts include $8 million and $6 million from purchased credit risk participation agreements at March 31, 2019 and December 31, 2018, and $35 million and $33 million from written credit risk participation agreements at March 31, 2019 and December 31, 2018, respectively. These notional amounts are calculated as the notional of the derivative participated adjusted by the relevant RWA conversion factor. |
8 | Notional amounts include $41 million related to the Visa derivative liability at both March 31, 2019 and December 31, 2018. See Note 15, “Guarantees” for additional information. |
40
Notes to Consolidated Financial Statements (Unaudited), continued
Netting of Derivative Instruments
The Company has various financial assets and financial liabilities that are subject to enforceable master netting agreements or similar agreements. The Company’s securities borrowed or purchased under agreements to resell, and securities sold under agreements to repurchase, that are subject to enforceable master netting agreements or similar agreements, are discussed in Note 3, “Federal Funds Sold and Securities Financing Activities.” The Company enters into ISDA or other legally enforceable industry standard master netting agreements with derivative counterparties. Under the terms of the master netting agreements, all transactions between the Company and the counterparty constitute a single business relationship such that in the event of default, the nondefaulting party is entitled to set off claims and apply property held by that party in respect of any transaction against obligations owed.
The following tables present total gross derivative instrument assets and liabilities at March 31, 2019 and December 31, 2018, which are adjusted to reflect the effects of legally enforceable master netting agreements and cash collateral received or paid when calculating the net amount reported in the Consolidated Balance Sheets. Also included in the tables are financial instrument collateral related to legally enforceable master netting agreements that represents securities collateral received or pledged and customer cash collateral held at third party custodians. These amounts are not offset on the Consolidated Balance Sheets but are shown as a reduction to total derivative instrument assets and liabilities to derive net derivative assets and liabilities. These amounts are limited to the derivative asset/liability balance, and accordingly, do not include excess collateral received/pledged.
(Dollars in millions) | Gross Amount | Amount Offset | Net Amount Presented in Consolidated Balance Sheets | Held/Pledged Financial Instruments | Net Amount | |||||||||||||||||
March 31, 2019 | ||||||||||||||||||||||
Derivative instrument assets: | ||||||||||||||||||||||
Derivatives subject to master netting arrangement or similar arrangement | $2,720 | $1,976 | $744 | $13 | $731 | |||||||||||||||||
Derivatives not subject to master netting arrangement or similar arrangement | 24 | — | 24 | — | 24 | |||||||||||||||||
Exchange traded derivatives | 384 | 124 | 260 | — | 260 | |||||||||||||||||
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|
| ||||||||
Total derivative instrument assets | $3,128 | $2,100 | $1,028 | 1 | $13 | $1,015 | ||||||||||||||||
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|
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|
|
|
|
| ||||||||
Derivative instrument liabilities: | ||||||||||||||||||||||
Derivatives subject to master netting arrangement or similar arrangement | $2,599 | $2,416 | $183 | $30 | $153 | |||||||||||||||||
Derivatives not subject to master netting arrangement or similar arrangement | 81 | — | 81 | — | 81 | |||||||||||||||||
Exchange traded derivatives | 124 | 124 | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total derivative instrument liabilities | $2,804 | $2,540 | $264 | 2 | $30 | $234 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
December 31, 2018 | ||||||||||||||||||||||
Derivative instrument assets: | ||||||||||||||||||||||
Derivatives subject to master netting arrangement or similar arrangement | $2,425 | $1,873 | $552 | $12 | $540 | |||||||||||||||||
Derivatives not subject to master netting arrangement or similar arrangement | 20 | — | 20 | — | 20 | |||||||||||||||||
Exchange traded derivatives | 186 | 119 | 67 | — | 67 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total derivative instrument assets | $2,631 | $1,992 | $639 | 1 | $12 | $627 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Derivative instrument liabilities: | ||||||||||||||||||||||
Derivatives subject to master netting arrangement or similar arrangement | $2,521 | $2,187 | $334 | $14 | $320 | |||||||||||||||||
Derivatives not subject to master netting arrangement or similar arrangement | 76 | — | 76 | — | 76 | |||||||||||||||||
Exchange traded derivatives | 119 | 119 | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total derivative instrument liabilities | $2,716 | $2,306 | $410 | 2 | $14 | $396 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | At March 31, 2019, $1.0 billion, net of $391 million offsetting cash collateral, is recognized in Trading assets and derivative instruments within the Company’s Consolidated Balance Sheets. At December 31, 2018, $639 million, net of $338 million offsetting cash collateral, is recognized in Trading assets and derivative instruments within the Company’s Consolidated Balance Sheets. |
2 | At March 31, 2019, $264 million, net of $831 million offsetting cash collateral, is recognized in Trading liabilities and derivative instruments within the Company’s Consolidated Balance Sheets. At December 31, 2018, $410 million, net of $652 million offsetting cash collateral, is recognized in Trading liabilities and derivative instruments within the Company’s Consolidated Balance Sheets. |
41
Notes to Consolidated Financial Statements (Unaudited), continued
Fair Value and Cash Flow Hedging Instruments
Fair Value Hedging
The Company enters into interest rate swap agreements as part of its risk management objectives for hedging exposure to changes in fair value due to changes in interest rates. These hedging arrangements convert certain fixed rate long-term debt and CD s to floating rates. For all designated fair value hedge relationships, changes in the fair value of the hedging instrument attributable to the hedged risk are recognized in the same income statement line as the earnings impact from the hedged item. There were no components of derivative gains or losses excluded in the Company’s assessment of hedge effectiveness related to the fair value hedges.
Cash Flow Hedging
The Company utilizes a comprehensive risk management strategy to monitor sensitivity of earnings to movements in interest rates. Specific types of funding and principal amounts hedged are determined based on prevailing market conditions and the shape of the yield curve. In conjunction with this strategy, the Company may employ various interest rate derivatives as risk management tools to hedge interest rate risk from recognized assets and liabilities or from forecasted transactions. The terms and notional amounts of derivatives are determined based on management’s assessment of future interest rates, as well as other factors.
The Company enters into interest rate swaps designated as cash flow hedging instruments to hedge its exposure to
contractually specified interest rate risk associated with floating rate loans. For the three months ended March 31, 2019, the amount ofpre-tax gain recognized in OCI on derivative instruments was $61 million. For the three months ended March 31, 2018, the amount ofpre-tax loss recognized in OCI on derivative instruments was $165 million. At March 31, 2019, the maturities for hedges of floating rate loans ranged from less than one year to seven years, with the weighted average being 2.6 years. At December 31, 2018, the maturities for hedges of floating rate loans ranged from less than one year to five years, with the weighted average being 2.5 years. These hedges have been highly effective in offsetting the designated risks. At March 31, 2019, $186 million of deferred netpre-tax losses on derivative instruments designated as cash flow hedges on floating rate loans recognized in AOCI are expected to be reclassified into net interest income during the next twelve months. The amount to be reclassified into income incorporates the impact from both active and terminated cash flow hedges, including the net interest income earned on the active hedges, assuming no changes in LIBOR. The Company may choose to terminate orde-designate a hedging relationship due to a change in the risk management objective for that specific hedge item, which may arise in conjunction with an overall balance sheet management strategy.
42
Notes to Consolidated Financial Statements (Unaudited), continued
The following table presents gains and losses on derivatives in fair value and cash flow hedging relationships by contract type and by income statement line item for the three months ended March 31, 2019 and 2018. The table does not disclose the financial impact of the activities that these derivative instruments are intended to hedge.
Net Interest Income | ||||||||||||
(Dollars in millions) | Interest and fees on LHFI | Interest on Long- term Debt | Total | |||||||||
Three Months Ended March 31, 2019 | ||||||||||||
Interest income/(expense), including the effects of fair value and cash flow hedges | $1,697 | ($125) | $1,572 | |||||||||
(Loss)/gain on fair value hedging relationships: | ||||||||||||
Interest rate contracts: | ||||||||||||
Amounts related to interest settlements on derivatives | $— | ($4) | ($4 | ) | ||||||||
Recognized on derivatives | — | 66 | 66 | |||||||||
Recognized on hedged items | — | (71) 1 | (71 | ) | ||||||||
|
|
|
|
|
|
| ||||||
Net expense recognized on fair value hedges | $— | ($9) | ($9 | ) | ||||||||
|
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|
|
|
|
| ||||||
| ||||||||||||
Loss on cash flow hedging relationships: | ||||||||||||
Interest rate contracts: | ||||||||||||
Amount ofpre-tax loss reclassified from AOCI into income | ($39) 2 | $— | ($39 | ) | ||||||||
|
|
|
|
|
|
| ||||||
Net expense recognized on cash flow hedges | ($39) | $— | ($39 | ) | ||||||||
|
|
|
|
|
|
| ||||||
Three Months Ended March 31, 2018 | ||||||||||||
Interest income/(expense), including the effects of fair value and cash flow hedges | $1,398 | ($74) | $1,324 | |||||||||
Gain/(loss) on fair value hedging relationships: | ||||||||||||
Interest rate contracts: | ||||||||||||
Amounts related to interest settlements on derivatives | $— | $3 | $3 | |||||||||
Recognized on derivatives | — | (72) | (72 | ) | ||||||||
Recognized on hedged items | — | 69 1 | 69 | |||||||||
|
|
|
|
|
|
| ||||||
Net income/(expense) recognized on fair value hedges | $— | $— | $— | |||||||||
|
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|
|
|
|
| ||||||
Loss on cash flow hedging relationships: | ||||||||||||
Interest rate contracts: | ||||||||||||
Amount ofpre-tax loss reclassified from AOCI into income | ($1) 2 | $— | ($1 | ) | ||||||||
|
|
|
|
|
|
| ||||||
Net expense recognized on cash flow hedges | ($1) | $— | ($1 | ) | ||||||||
|
|
|
|
|
|
|
1 | Includes amortization fromde-designated fair value hedging relationships. |
2 | These amounts includepre-tax gains/(losses) related to cash flow hedging relationships that have been terminated and were reclassified into earnings consistent with the pattern of net cash flows expected to be recognized. |
The following table presents the carrying amount of hedged liabilities on the Consolidated Balance Sheets in fair value hedging relationships and the associated cumulative basis adjustment related to the application of hedge accounting:
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Liabilities | ||||||||||||
(Dollars in millions) | Carrying Amount of Hedged Liabilities | Hedged Items Currently Designated | Hedged Items No Longer Designated | |||||||||
March 31, 2019 | ||||||||||||
Long-term debt | $9,233 | $54 | ($114) | |||||||||
December 31, 2018 | ||||||||||||
Long-term debt | $8,411 | ($10) | ($120) | |||||||||
Brokered time deposits | 29 | — | — |
43
Notes to Consolidated Financial Statements (Unaudited), continued
Economic Hedging Instruments and Trading Activities
In addition to designated hedge accounting relationships, the Company also enters into derivatives as an end user to economically hedge risks associated with certainnon-derivative and derivative instruments, along with entering into derivatives in a trading capacity with its clients.
The primary risks that the Company economically hedges are interest rate risk, foreign exchange risk, and credit risk. The Company mitigates these risks by entering into offsetting derivatives either on an individual basis or collectively on a macro basis.
The Company utilizes interest rate derivatives as economic hedges related to:
• | Residential MSRs. The Company hedges these instruments with a combination of interest rate derivatives, including forward and option contracts, futures, and forward rate agreements. |
• | Residential mortgageIRLCs and LHFS. The Company hedges these instruments using forward and option contracts, futures, and forward rate agreements. |
The Company is exposed to volatility and changes in foreign exchange rates associated with certain commercial loans. To hedge against this foreign exchange rate risk, the Company enters into foreign exchange rate contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.
The Company enters into CDS to hedge credit risk associated with certain loans held within its Wholesale segment. The Company accounts for these contracts as derivatives, and accordingly, recognizes these contracts at fair value, with changes in fair value recognized in Other noninterest income in the Consolidated Statements of Income.
Trading activity primarily includes interest rate swaps, equity derivatives, CDS, futures, options, foreign exchange rate contracts, and commodity derivatives. These derivatives are entered into in a dealer capacity to facilitate client transactions, or are utilized as a risk management tool by the Company as an end user (predominantly in certain macro-hedging strategies).
The impacts of derivative instruments used for economic hedging or trading purposes on the Consolidated Statements of Income are presented in the following table:
Classification of Gain/(Loss) Recognized in Income on Derivatives | Amount of Gain/(Loss) Recognized in Income on Derivatives During the Three Months Ended March 31 | |||||||||||
(Dollars in millions) | 2019 | 2018 | ||||||||||
Derivative instruments not designated as hedging instruments: |
| |||||||||||
Interest rate contracts hedging: | ||||||||||||
Residential MSRs | Mortgage related income | $113 | ($93) | |||||||||
LHFS, IRLCs | �� | Mortgage related income | (19) | 46 | ||||||||
LHFI | Other noninterest income | (1) | 2 | |||||||||
Trading activity | Trading income | 14 | 9 | |||||||||
Foreign exchange rate contracts hedging loans and trading activity | Trading income | 5 | (2) | |||||||||
Credit contracts hedging: | ||||||||||||
LHFI | Other noninterest income | (10) | 1 | |||||||||
Trading activity | Trading income | 6 | 6 | |||||||||
Equity contracts hedging trading activity | Trading income | 18 | 1 | |||||||||
Other contracts: | ||||||||||||
IRLCs and other | | Mortgage related income; Commercial real estate related income | 33 | (6) | ||||||||
|
|
|
| |||||||||
Total | $159 | ($36) | ||||||||||
|
|
|
|
44
Notes to Consolidated Financial Statements (Unaudited), continued
Credit Derivative Instruments
As part of the Company’s trading businesses, the Company enters into contracts that are, in form or substance, written guarantees; specifically, CDS, risk participations, and TRS. The Company accounts for these contracts as derivatives, and accordingly, records these contracts at fair value, with changes in fair value recognized in Trading income in the Consolidated Statements of Income.
The Company has also entered into TRS contracts on loans. The Company’s TRS business consists of matched trades, such that when the Company pays depreciation on one TRS, it receives the same amount on the matched TRS. To mitigate its credit risk, the Company typically receives initial cash collateral from the counterparty upon entering into the TRS and is entitled to additional collateral if the fair value of the underlying reference assets deteriorates. There were $2.2 billion and $2.0 billion of outstanding TRS notional balances at March 31, 2019 and December 31, 2018, respectively. The fair values of these TRS assets and liabilities at March 31, 2019 were $37 million and $34 million, respectively, and related cash collateral held at March 31, 2019 was $592 million. The fair values of the TRS assets and liabilities at December 31, 2018 were $97 million and $94 million, respectively, and related cash collateral held at December 31, 2018 was $601 million. For additional information on the Company’s TRS contracts, see Note 11, “Certain Transfers of Financial Assets and Variable Interest Entities,” to the Consolidated Financial Statements in this Form10-Q, as well as Note 20, “Fair Value Election and Measurement,” to the Company’s 2018 Annual Report on Form10-K.
The Company writes risk participations, which are credit derivatives, whereby the Company has guaranteed payment to a dealer counterparty in the event the counterparty experiences a loss on a derivative, such as an interest rate swap, due to a failure to pay by the counterparty’s customer (the “obligor”) on that derivative. The Company manages its payment risk on its risk participations by monitoring the creditworthiness of the obligors, which are all corporations or partnerships, through the normal credit review process that the Company would have performed had it entered into a derivative directly with the obligors. To date, no material losses have been incurred related to the Company’s written risk participations. At March 31, 2019, the remaining terms on these risk participations generally ranged from less than one year to 10 years, with a weighted average term on the maximum estimated exposure of 6.4 years. At December 31, 2018, the remaining terms on these risk participations generally ranged from less than one year to 10 years, with a weighted average term on the maximum estimated exposure of 5.9 years. The Company’s maximum estimated exposure to written risk participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $234 million and $217 million at March 31, 2019 and December 31, 2018, respectively. The fair values of the written risk participations were immaterial at both March 31, 2019 and December 31, 2018.
45
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 17 - FAIR VALUE ELECTION AND MEASUREMENT
The Company measures certain assets and liabilities at fair value, which are classified as level 1, 2, or 3 within the fair value hierarchy, as shown below, on the basis of whether the measurement employs observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions, taking into account information about market participant assumptions that is readily available.
• | Level 1: Quoted prices for identical instruments in active markets |
• | Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets |
• | Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable |
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The Company’s recurring fair value measurements are based on either a requirement to measure such assets and liabilities at fair value or on the Company’s election to measure certain financial assets and liabilities at fair value. Assets and liabilities that are required to be measured at fair value on a recurring basis include trading securities, derivative instruments, securities AFS, and certain other equity securities. Assets and liabilities that the Company has elected to measure at fair value on a recurring basis include trading loans, certain LHFS and LHFI, residential MSRs, brokered time deposits, and certain structured notes and fixed rate issuances included in long-term debt.
The Company elects to measure certain assets and liabilities at fair value to better align its financial performance with the economic value of actively traded or hedged assets or liabilities. The use of fair value also enables the Company to mitigatenon-economic earnings volatility caused from financial assets and liabilities being measured using different bases of accounting, as well as to more accurately portray the active and dynamic management of the Company’s balance sheet.
The Company uses various valuation techniques and assumptions in estimating fair value. The assumptions used to
estimate the value of an instrument have varying degrees of impact to the overall fair value of an asset or liability. This process involves gathering multiple sources of information, including broker quotes, values provided by pricing services, trading activity in other identical or similar securities, market indices, and pricing matrices. When observable market prices for the asset or liability are not available, the Company employs various modeling techniques, such as discounted cash flow analyses, to estimate fair value. Models used to produce material financial reporting information are validated prior to use and following any material change in methodology. Their performance is monitored at least quarterly, and any material deterioration in model performance is escalated.
The Company has formal processes and controls in place to support the appropriateness of its fair value estimates. For fair values obtained from a third party, or those that include certain trader estimates of fair value, there is an independent price validation function that provides oversight for these estimates. For level 2 instruments and certain level 3 instruments, the validation generally involves evaluating pricing received from two or more third party pricing sources that are widely used by market participants. The Company evaluates this pricing information from both a qualitative and quantitative perspective and determines whether any pricing differences exceed acceptable thresholds. If thresholds are exceeded, the Company assesses differences in valuation approaches used, which may include contacting a pricing service to gain further insight into the valuation of a particular security or class of securities to resolve the pricing variance, which could include an adjustment to the price used for financial reporting purposes.
The Company classifies instruments within level 2 in the fair value hierarchy when it determines that external pricing sources estimated fair value using prices for similar instruments trading in active markets. A wide range of quoted values from pricing sources may imply a reduced level of market activity and indicate that significant adjustments to price indications have been made. In such cases, the Company evaluates whether the asset or liability should be classified as level 3.
Determining whether to classify an instrument as level 3 involves judgment and is based on a variety of subjective factors, including whether a market is inactive. A market is considered inactive if significant decreases in the volume and level of activity for the asset or liability have been observed.
46
Notes to Consolidated Financial Statements (Unaudited), continued
Recurring Fair Value Measurements
The following tables present certain information regarding assets and liabilities measured at fair value on a recurring basis and the changes in fair value for those specific financial instruments for which fair value has been elected. For a discussion of the
valuation techniques and inputs used in estimating fair value for assets and liabilities measured at fair value on a recurring basis, see Note 20, “Fair Value Election and Measurement,” to the Company’s 2018 Annual Report on Form10-K.
March 31, 2019 | ||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||
(Dollars in millions) | Level 1 | Level 2 | Level 3 | Netting Adjustments 1 | Assets/Liabilities at Fair Value | |||||||||||||||
Assets | ||||||||||||||||||||
Trading assets and derivative instruments: | ||||||||||||||||||||
U.S. Treasury securities | $258 | $— | $— | $— | $258 | |||||||||||||||
Federal agency securities | — | 281 | — | — | 281 | |||||||||||||||
U.S. states and political subdivisions | — | 33 | — | — | 33 | |||||||||||||||
MBS - agency | — | 814 | — | — | 814 | |||||||||||||||
Corporate and other debt securities | — | 889 | — | — | 889 | |||||||||||||||
CP | — | 283 | — | — | 283 | |||||||||||||||
Equity securities | 71 | — | — | — | 71 | |||||||||||||||
Derivative instruments | 384 | 2,721 | 23 | (2,100 | ) | 1,028 | ||||||||||||||
Trading loans2 | — | 2,602 | — | — | 2,602 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total trading assets and derivative instruments | 713 | 7,623 | 23 | (2,100 | ) | 6,259 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities AFS: | ||||||||||||||||||||
U.S. Treasury securities | 4,259 | — | — | — | 4,259 | |||||||||||||||
Federal agency securities | — | 142 | — | — | 142 | |||||||||||||||
U.S. states and political subdivisions | — | 593 | — | — | 593 | |||||||||||||||
MBS - agency residential | — | 23,210 | — | — | 23,210 | |||||||||||||||
MBS - agency commercial | — | 2,624 | — | — | 2,624 | |||||||||||||||
MBS -non-agency commercial | — | 1,012 | — | — | 1,012 | |||||||||||||||
Corporate and other debt securities | — | 13 | — | — | 13 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total securities AFS | 4,259 | 27,594 | — | — | 31,853 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LHFS | — | 1,059 | — | — | 1,059 | |||||||||||||||
LHFI | — | — | 134 | — | 134 | |||||||||||||||
Residential MSRs | — | — | 1,883 | — | 1,883 | |||||||||||||||
Other assets | 85 | — | — | — | 85 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Trading liabilities and derivative instruments: | ||||||||||||||||||||
U.S. Treasury securities | 873 | — | — | — | 873 | |||||||||||||||
MBS - agency | — | 3 | — | — | 3 | |||||||||||||||
Corporate and other debt securities | — | 456 | — | — | 456 | |||||||||||||||
Equity securities | 13 | — | — | — | 13 | |||||||||||||||
Derivative instruments | 124 | 2,673 | 7 | (2,540 | ) | 264 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total trading liabilities and derivative instruments | 1,010 | 3,132 | 7 | (2,540 | ) | 1,609 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Brokered time deposits | — | 473 | — | — | 473 | |||||||||||||||
Long-term debt | — | 296 | — | — | 296 |
1 | Amounts represent offsetting cash collateral received from, and paid to, the same derivative counterparties, and the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement or similar agreement exists. See Note 16, “Derivative Financial Instruments,” for additional information. |
2 | At March 31, 2019, includes $2.2 billion of loans related to the Company’s TRS business, $91 million of loans related to the Company’s loan sales and trading business held in inventory, and $309 million of loans backed by the SBA held in inventory. |
47
Notes to Consolidated Financial Statements (Unaudited), continued
December 31, 2018 | ||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||
(Dollars in millions) | Level 1 | Level 2 | Level 3 | Netting Adjustments 1 | Assets/Liabilities at Fair Value | |||||||||||||||
Assets | ||||||||||||||||||||
Trading assets and derivative instruments: | ||||||||||||||||||||
U.S. Treasury securities | $262 | $— | $— | $— | $262 | |||||||||||||||
Federal agency securities | — | 188 | — | — | 188 | |||||||||||||||
U.S. states and political subdivisions | — | 54 | — | — | 54 | |||||||||||||||
MBS - agency | — | 860 | — | — | 860 | |||||||||||||||
Corporate and other debt securities | — | 700 | — | — | 700 | |||||||||||||||
CP | — | 190 | — | — | 190 | |||||||||||||||
Equity securities | 73 | — | — | — | 73 | |||||||||||||||
Derivative instruments | 186 | 2,425 | 20 | (1,992 | ) | 639 | ||||||||||||||
Trading loans2 | — | 2,540 | — | — | 2,540 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total trading assets and derivative instruments | 521 | 6,957 | 20 | (1,992 | ) | 5,506 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities AFS: | ||||||||||||||||||||
U.S. Treasury securities | 4,211 | — | — | — | 4,211 | |||||||||||||||
Federal agency securities | — | 221 | — | — | 221 | |||||||||||||||
U.S. states and political subdivisions | — | 589 | — | — | 589 | |||||||||||||||
MBS - agency residential | — | 22,864 | — | — | 22,864 | |||||||||||||||
MBS - agency commercial | — | 2,627 | — | — | 2,627 | |||||||||||||||
MBS -non-agency commercial | — | 916 | — | — | 916 | |||||||||||||||
Corporate and other debt securities | — | 14 | — | — | 14 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total securities AFS | 4,211 | 27,231 | — | — | 31,442 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LHFS | — | 1,178 | — | — | 1,178 | |||||||||||||||
LHFI | — | — | 163 | — | 163 | |||||||||||||||
Residential MSRs | — | — | 1,983 | — | 1,983 | |||||||||||||||
Other assets | 95 | — | — | — | 95 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Trading liabilities and derivative instruments: | ||||||||||||||||||||
U.S. Treasury securities | 801 | — | — | — | 801 | |||||||||||||||
MBS - agency | — | 3 | — | — | 3 | |||||||||||||||
Corporate and other debt securities | — | 385 | — | — | 385 | |||||||||||||||
Equity securities | 5 | — | — | — | 5 | |||||||||||||||
Derivative instruments | 119 | 2,590 | 7 | (2,306 | ) | 410 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total trading liabilities and derivative instruments | 925 | 2,978 | 7 | (2,306 | ) | 1,604 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| ||||||||||||||||||||
Brokered time deposits | — | 403 | — | — | 403 | |||||||||||||||
Long-term debt | — | 289 | — | — | 289 |
1 | Amounts represent offsetting cash collateral received from, and paid to, the same derivative counterparties, and the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement or similar agreement exists. See Note 16, “Derivative Financial Instruments,” for additional information. |
2 | At December 31, 2018, includes $2.0 billion of loans related to the Company’s TRS business, $137 million of loans related to the Company’s loan sales and trading business held in inventory, and $366 million of loans backed by the SBA loans held in inventory, measured at fair value. |
48
Notes to Consolidated Financial Statements (Unaudited), continued
The following tables present the difference between fair value and the aggregate UPB for which the FVO has been elected for certain trading loans, LHFS, LHFI, brokered time deposits, and long-term debt instruments.
(Dollars in millions) | Fair Value at March 31, 2019 | Aggregate UPB at March 31, 2019 | Fair Value Over/(Under) Unpaid Principal | |||||||||
Assets: | ||||||||||||
Trading loans | $2,602 | $2,540 | $62 | |||||||||
LHFS: | ||||||||||||
Accruing | 1,059 | 1,024 | 35 | |||||||||
LHFI: | ||||||||||||
Accruing | 130 | 132 | (2 | ) | ||||||||
Nonaccrual | 4 | 5 | (1 | ) | ||||||||
Liabilities: | ||||||||||||
Brokered time deposits | 473 | 475 | (2 | ) | ||||||||
Long-term debt | 296 | 292 | 4 | |||||||||
(Dollars in millions) | Fair Value at December 31, 2018 | Aggregate UPB at December 31, 2018 | Fair Value Over/(Under) Unpaid Principal | |||||||||
Assets: | ||||||||||||
Trading loans | $2,540 | $2,526 | $14 | |||||||||
LHFS: | ||||||||||||
Accruing | 1,178 | 1,128 | 50 | |||||||||
LHFI: | ||||||||||||
Accruing | 158 | 163 | (5 | ) | ||||||||
Nonaccrual | 5 | 6 | (1 | ) | ||||||||
Liabilities: | ||||||||||||
Brokered time deposits | 403 | 403 | — | |||||||||
Long-term debt | 289 | 286 | 3 |
49
Notes to Consolidated Financial Statements (Unaudited), continued
The following tables present the changes in fair value of financial instruments for which the FVO has been elected. The tables do not reflect the change in fair value attributable to related economic hedges that the Company uses to mitigate market-related risks associated with the financial instruments. Generally, changes in the fair value of economic hedges are recognized in
Trading income, Mortgage related income, Commercial real estate related income, or Other noninterest income as appropriate, and are designed to partially offset the change in fair value of the financial instruments referenced in the tables below. The Company’s economic hedging activities are deployed at both the instrument and portfolio level.
Fair Value Gain/(Loss) for the Three Months Ended March 31, 2019 for Items Measured at Fair Value Pursuant to Election of the FVO | ||||||||||||||||
(Dollars in millions) | Trading Income | Mortgage Related Income1 | Other Noninterest Income | Total Changes in Fair Values Included in Earnings2 | ||||||||||||
Assets: | ||||||||||||||||
Trading loans3 | $7 | $— | $— | $7 | ||||||||||||
LHFS4 | — | 15 | — | 15 | ||||||||||||
LHFI | — | — | 2 | 2 | ||||||||||||
Residential MSRs | — | (160 | ) | — | (160 | ) | ||||||||||
Liabilities: | ||||||||||||||||
Brokered time deposits | (12 | ) | — | — | (12 | ) | ||||||||||
Long-term debt | (7 | ) | — | — | (7 | ) |
1 | Income related to LHFS does not include income from IRLCs. For the three months ended March 31, 2019, income related to residential MSRs includes income recognized upon the sale of loans reported at LOCOM. |
2 | Changes in fair value for the three months ended March 31, 2019 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS, LHFI, brokered time deposits, and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated Statements of Income. |
3 | Includes an immaterial amount of gains or losses in the Consolidated Statements of Income due to changes in fair value attributable to instrument-specific credit risk for three months ended March 31, 2019. |
4 | Includes an immaterial amount of gains or losses in the Consolidated Statements of Income due to changes in fair value attributable to borrower-specific credit risk for the three months ended March 31, 2019. |
Fair Value Gain/(Loss) for the Three Months Ended March 31, 2018 for Items Measured at Fair Value Pursuant to Election of the FVO | ||||||||||||||||
(Dollars in millions) | Trading Income | Mortgage Related Income1 | Other Noninterest Income | Total Changes in Fair Values Included in Earnings2 | ||||||||||||
Assets: | ||||||||||||||||
Trading loans3 | $2 | $— | $— | $2 | ||||||||||||
LHFS4 | — | (13 | ) | — | (13 | ) | ||||||||||
LHFI | — | — | (2 | ) | (2 | ) | ||||||||||
Residential MSRs | — | 59 | — | 59 | ||||||||||||
Liabilities: | ||||||||||||||||
Brokered time deposits | 7 | — | — | 7 | ||||||||||||
Long-term debt | 3 | — | — | 3 |
1 | Income related to LHFS does not include income from IRLCs. For the three months ended March 31, 2018, income related to residential MSRs includes income recognized upon the sale of loans reported at LOCOM. |
2 | Changes in fair value for the three months ended March 31, 2018 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS, LHFI, brokered time deposits, and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated Statements of Income. |
3 | Includes an immaterial amount of gains or losses in the Consolidated Statements of Income due to changes in fair value attributable to instrument-specific credit risk for three months ended March 31, 2018. |
4 | Includes an immaterial amount of gains or losses in the Consolidated Statements of Income due to changes in fair value attributable to borrower-specific credit risk for the three months ended March 31, 2018. |
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Notes to Consolidated Financial Statements (Unaudited), continued
The valuation technique and range, including weighted average, of the unobservable inputs associated with the Company’s level 3 assets and liabilities are as follows:
Level 3 Significant Unobservable Input Assumptions | ||||||||||
(Dollars in millions) | Fair value March 31, 2019 | Valuation Technique | Unobservable Input | Range (Weighted Average) 1 | ||||||
Assets | ||||||||||
Trading assets and derivative instruments: | ||||||||||
Derivative instruments, net2 | $16 | Internal model | Pull through rate MSR value | 37-100% (81%) 21-160 bps (112 bps) | ||||||
LHFI | 130 | Monte Carlo/Discounted cash flow | Option adjusted spread Conditional prepayment rate Conditional default rate | 62-250 bps (174 bps) 7-28 CPR (15 CPR) 0-1 CDR (0.5 CDR) | ||||||
4 | Collateral based pricing | Appraised value | NM3 | |||||||
Residential MSRs | 1,883 | Monte Carlo/Discounted cash flow | Conditional prepayment rate Option adjusted spread | 6-30 CPR (13 CPR) 0-118% (2%) |
1 | Unobservable inputs were weighted by the relative fair value of the financial instruments. |
2 | Amount represents the net of IRLC assets and liabilities and includes the derivative liability associated with the Company’s sale of Visa shares. Refer to the “Trading Liabilities and Derivative Instruments” section in Note 20, “Fair Value Election and Measurement,” to the Company’s 2018 Annual Report on Form 10-K, for a discussion of valuation assumptions related to the Visa derivative liability. |
3 | Not meaningful. |
Level 3 Significant Unobservable Input Assumptions | ||||||||||||||
(Dollars in millions) | Fair value December 31, 2018 | Valuation Technique | Unobservable Input | Range (Weighted Average) 1 | ||||||||||
Assets | ||||||||||||||
Trading assets and derivative instruments: | ||||||||||||||
Derivative instruments, net2 | $13 | Internal model | | Pull through rate MSR value |
| 41-100% (81%) 11-165 bps (108 bps) | ||||||||
LHFI | 158 | | Monte Carlo/Discounted cash flow | | | Option adjusted spread Conditional prepayment rate Conditional default rate | | 0-250 bps (164 bps) 7-22 CPR (12 CPR) 0-1 CDR (0.6 CDR) | ||||||
5 | Collateral based pricing | Appraised value | NM3 | |||||||||||
Residential MSRs | 1,983 | | Monte Carlo/Discounted cash flow | | | Conditional prepayment rate Option adjusted spread | | 6-30 CPR (13 CPR) 0-116% (2%) |
1 | Unobservable inputs were weighted by the relative fair value of the financial instruments. |
2 | Amount represents the net of IRLC assets and liabilities and includes the derivative liability associated with the Company’s sale of Visa shares. Refer to the “Trading Liabilities and Derivative Instruments” section in Note 20, “Fair Value Election and Measurement,” to the Company’s 2018 Annual Report on Form 10-K, for a discussion of valuation assumptions related to the Visa derivative liability. |
3 | Not meaningful. |
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Notes to Consolidated Financial Statements (Unaudited), continued
The following tables present a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (other than residential MSRs which are disclosed in Note 8, “Goodwill and Other Intangible Assets”). Transfers into and out
of the fair value hierarchy levels are assumed to occur at the end of the period in which the transfer occurred. None of the transfers into or out of level 3 have been the result of using alternative valuation approaches to estimate fair values.
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Beginning Balance January 1, 2019 | Included in Earnings | OCI | Purchases | Sales | Settlements | Transfers to/from Other Balance Sheet Line Items | Transfers into Level 3 | Transfers out of Level 3 | Fair Value March 31, 2019 | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||||||
Derivative instruments, net | $13 | $35 | 1 | $— | $— | $— | ($1 | ) | ($31 | ) 2 | $— | $— | $16 | |||||||||||||||||||||||||||
LHFI | 163 | 2 | 3 | — | — | — | (7 | ) | — | 1 | (25 | ) | 134 |
1 | Includes issuances, fair value changes, and expirations. Amount related to residential IRLCs is recognized in Mortgage related income, amount related to commercial IRLC s is recognized in Commercial real estate related income, and amount related to Visa derivative liability is recognized in Other noninterest expense. Included $22 million in earnings during the three months ended March 31, 2019, related to changes in unrealized gains on net derivative instruments still held at March 31, 2019. |
2 | During the three months ended March 31, 2019, the Company transferred $31 million of net IRLC assets out of level 3 as the associated loans were closed. |
3 | Amounts are generally included in Mortgage related income; however, the mark on certain fair value loans is included in Other noninterest income. Included $1 million in earnings during the three months ended March 31, 2019, related to changes in unrealized gains on LHFI still held at March 31, 2019. |
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Beginning Balance January 1, 2018 | Included in Earnings | OCI | Purchases | Sales | Settlements | Transfers to/from Other Balance Sheet Line Items | Transfers into Level 3 | Transfers out of Level 3 | Fair Value March 31, 2018 | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||||||
Derivative instruments, net | $— | ($6) 1 | $— | $— | $— | $1 | $6 2 | $— | $— | $1 | ||||||||||||||||||||||||||||||
Securities AFS: | ||||||||||||||||||||||||||||||||||||||||
MBS -non-agency residential | 59 | — | — | — | — | (2 | ) | — | — | (57 | ) | — | ||||||||||||||||||||||||||||
ABS | 8 | — | — | — | — | (1 | ) | — | — | (7 | ) | — | ||||||||||||||||||||||||||||
Corporate and other debt securities | 5 | — | — | — | — | — | — | — | (5 | ) | — | |||||||||||||||||||||||||||||
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LHFI | 196 | (2) 3 | — | — | — | (7 | ) | — | 1 | — | 188 |
1 | Includes issuances, fair value changes, and expirations. Amount related to residential IRLCs is recognized in Mortgage related income, amount related to commercial IRLCs is recognized in Commercial real estate related income, and amount related to Visa derivative liability is recognized in Other noninterest expense. Included $16 million in earnings during the three months ended March 31, 2018, related to changes in unrealized gains on net derivative instruments still held at March 31, 2018. |
2 | During the three months ended March 31, 2018, the Company transferred $6 million of net IRLC liabilities out of level 3 as the associated loans were closed. |
3 | Amounts are generally included in Mortgage related income; however, the mark on certain fair value loans is included in Other noninterest income. Included $3 million in earnings during the three months ended March 31, 2018, related to changes in unrealized losses on LHFI still held at March 31, 2018. |
52
Notes to Consolidated Financial Statements (Unaudited), continued
Non-recurring Fair Value Measurements
The following tables present gains and losses recognized on assets still held at period end, and measured at fair value on anon-recurring basis, for the three months ended March 31, 2019 and the year ended December 31, 2018. Adjustments to fair value generally result from the application of LOCOM, or the
measurement alternative, or through write-downs of individual assets. The tables do not reflect changes in fair value attributable to economic hedges the Company may have used to mitigate interest rate risk associated with LHFS.
Fair Value Measurements | Losses for the Three Months Ended March 31, 2019 | |||||||||||||||||||
(Dollars in millions) | March 31, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
LHFS | $74 | $— | $10 | $64 | $— | |||||||||||||||
LHFI | 66 | — | — | 66 | — | |||||||||||||||
OREO | 13 | — | — | 13 | (2) | |||||||||||||||
Other assets | 17 | — | — | 17 | (3) | |||||||||||||||
Fair Value Measurements | (Losses)/Gains for the Year Ended December 31, 2018 | |||||||||||||||||||
(Dollars in millions) | December 31, 2018 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
LHFS | $47 | $— | $47 | $— | ($1) | |||||||||||||||
LHFI | 63 | — | — | 63 | — | |||||||||||||||
OREO | 19 | — | — | 19 | (4) | |||||||||||||||
Other assets | 67 | — | 47 | 20 | 24 |
Discussed below are the valuation techniques and inputs used in estimating fair values for assets measured at fair value on anon-recurring basis and classified as level 2 and/or 3.
Loans Held for Sale
At March 31, 2019 and December 31, 2018, LHFS classified as level 2 consisted of commercial loans that were valued using market prices and measured at LOCOM. During both the three months ended March 31, 2019 and the year ended December 31, 2018, the Company recognized an immaterial amount of impairment charges attributable to changes in the fair value of LHFS.
During the three months ended March 31, 2019, the Company transferred $64 million of C&I NPLs from LHFI to LHFS and recognized $16 million in charge-offs to reflect the loans’ estimated market value. There were no gains/(losses) recognized in earnings during the three months ended March 31, 2019, as the charge-offs related to these loans were a component of the ALLL.
Loans Held for Investment
At March 31, 2019 and December 31, 2018, LHFI classified as level 3 consisted primarily of consumer loans discharged in Chapter 7 bankruptcy that had not been reaffirmed by the borrower. Cash proceeds from the sale of the underlying collateral is the expected source of repayment for a majority of these loans. Accordingly, the fair value of these loans is derived from the estimated fair value of the underlying collateral, incorporating market data if available. Due to the lack of market data for similar assets, all of these loans are classified as level 3. There were no gains/(losses) recognized during the three months ended March 31, 2019 or during the year ended December 31, 2018, as the charge-offs related to these loans are a component of the ALLL.
OREO
OREO is measured at the lower of cost or fair value less costs to sell. Level 3 OREO consists primarily of residential homes,
commercial properties, and vacant lots and land for which initial valuations are based on property-specific appraisals, broker pricing opinions, or other limited, highly subjective market information. Updated value estimates are received regularly for level 3 OREO.
Other Assets
Other assets consist of equity investments, other repossessed assets, assets under operating leases where the Company is the lessor, branch properties, and land held for sale.
The Company elected the measurement alternative for measuring certain equity securities without readily determinable fair values, which are adjusted based on any observable price changes in orderly transactions. These equity securities are classified as level 2 based on the valuation methodology and associated inputs. There were no remeasurement gains/(losses) recognized during the three months ended March 31, 2019 on these equity securities. During the year ended December 31, 2018, the Company recognized remeasurement gains of $30 million on these equity securities.
Other repossessed assets include repossessed personal property that is measured at fair value less cost to sell. These assets are classified as level 3 as their fair value is determined based on a variety of subjective, unobservable factors. There were no losses recognized in earnings by the Company on other repossessed assets during the three months ended March 31, 2019 or during the year ended December 31, 2018, as the impairment charges on repossessed personal property were a component of the ALLL.
The Company monitors the fair value of assets under operating leases where the Company is the lessor and recognizes impairment on the leased asset to the extent the carrying value is not recoverable and is greater than its fair value. Fair value is determined using collateral specific pricing digests, external
53
Notes to Consolidated Financial Statements (Unaudited), continued
appraisals, broker opinions, recent sales data from industry equipment dealers, and the discounted cash flows derived from the underlying lease agreement. As market data for similar assets and lease arrangements is available and used in the valuation, these assets are considered level 2. No impairment charges were recognized during the three months ended March 31, 2019 attributable to changes in the fair value of various personal property under operating leases. During the year ended December 31, 2018, the Company recognized an immaterial amount of impairment charges attributable to changes in the fair value of various personal property under operating leases.
Branch properties are classified as level 3, as their fair value is based on property-specific appraisals and broker opinions. The
Company recognized an immaterial amount of impairment charges on branch properties during the three months ended March 31, 2019. During the year ended December 31, 2018, the Company recognized impairment charges of $5 million on branch properties.
Land held for sale is recorded at the lesser of carrying value or fair value less cost to sell, and is considered level 3 as its fair value is determined based on property-specific appraisals and broker opinions. The Company recognized no impairment charges on land held for sale during the three months ended March 31, 2019. During the year ended December 31, 2018, the Company recognized an immaterial amount of impairment charges on land held for sale.
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Notes to Consolidated Financial Statements (Unaudited), continued
Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments are as follows:
March 31, 2019 | Fair Value Measurements | |||||||||||||||||||||
(Dollars in millions) | Measurement Category | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||||
Cash and cash equivalents | Amortized cost | $5,932 | $5,932 | $5,932 | $— | $— | ||||||||||||||||
Trading assets and derivative instruments | Fair value | 6,259 | 6,259 | 713 | 5,523 | 23 | ||||||||||||||||
Securities AFS | Fair value | 31,853 | 31,853 | 4,259 | 27,594 | — | ||||||||||||||||
LHFS | Amortized cost | 722 | 768 | — | 512 | 256 | ||||||||||||||||
Fair value | 1,059 | 1,059 | — | 1,059 | — | |||||||||||||||||
LHFI, net | Amortized cost | 153,456 | 153,039 | — | — | 153,039 | ||||||||||||||||
Fair value | 134 | 134 | — | — | 134 | |||||||||||||||||
Other1 | Amortized cost | 769 | 769 | — | — | 769 | ||||||||||||||||
Fair value | 85 | 85 | 85 | — | — | |||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||
Consumer and other time deposits | Amortized cost | 16,108 | 15,891 | — | 15,891 | — | ||||||||||||||||
Brokered time deposits | Amortized cost | 587 | 564 | — | 564 | — | ||||||||||||||||
Fair value | 473 | 473 | — | 473 | — | |||||||||||||||||
Short-term borrowings | Amortized cost | 10,390 | 10,390 | — | 10,390 | — | ||||||||||||||||
Long-term debt | Amortized cost | 17,099 | 17,244 | — | 15,538 | 1,706 | ||||||||||||||||
Fair value | 296 | 296 | — | 296 | — | |||||||||||||||||
Trading liabilities and derivative instruments | Fair value | 1,609 | 1,609 | 1,010 | 592 | 7 | ||||||||||||||||
1 Other financial assets recorded at amortized cost consist of FHLB of Atlanta stock and Federal Reserve Bank of Atlanta stock. Other financial assets recorded at fair value consist of mutual fund investments and other equity securities with readily determinable fair values. |
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December 31, 2018 | Fair Value Measurements | |||||||||||||||||||||
(Dollars in millions) | Measurement Category | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||||
Cash and cash equivalents | Amortized cost | $7,495 | $7,495 | $7,495 | $— | $— | ||||||||||||||||
Trading assets and derivative instruments | Fair value | 5,506 | 5,506 | 521 | 4,965 | 20 | ||||||||||||||||
Securities AFS | Fair value | 31,442 | 31,442 | 4,211 | 27,231 | — | ||||||||||||||||
LHFS | Amortized cost | 290 | 291 | — | 261 | 30 | ||||||||||||||||
Fair value | 1,178 | 1,178 | — | 1,178 | — | |||||||||||||||||
LHFI, net | Amortized cost | 150,061 | 148,167 | — | — | 148,167 | ||||||||||||||||
Fair value | 163 | 163 | — | — | 163 | |||||||||||||||||
Other1 | Amortized cost | 630 | 630 | — | — | 630 | ||||||||||||||||
Fair value | 95 | 95 | 95 | — | — | |||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||
Consumer and other time deposits | Amortized cost | 15,355 | 15,106 | — | 15,106 | — | ||||||||||||||||
Brokered time deposits | Amortized cost | 642 | 615 | — | 615 | — | ||||||||||||||||
Fair value | 403 | 403 | — | 403 | — | |||||||||||||||||
Short-term borrowings | Amortized cost | 8,772 | 8,772 | — | 8,772 | — | ||||||||||||||||
Long-term debt | Amortized cost | 14,783 | 14,729 | — | 13,024 | 1,705 | ||||||||||||||||
Fair value | 289 | 289 | — | 289 | — | |||||||||||||||||
Trading liabilities and derivative instruments | Fair value | 1,604 | 1,604 | 925 | 672 | 7 |
1 | Other financial assets recorded at amortized cost consist of FHLB of Atlanta stock and Federal Reserve Bank of Atlanta stock. Other financial assets recorded at fair value consist of mutual fund investments and other equity securities with readily determinable fair values. |
Unfunded loan commitments and letters of credit are not included in the table above. At March 31, 2019 and December 31, 2018, the Company had $72.5 billion and $72.0 billion, respectively, of unfunded commercial loan commitments and letters of credit. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related unfunded commitments reserve, which totaled $68 million and
$72 million at March 31, 2019 and December 31, 2018, respectively. No active trading market exists for these instruments, and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of consumer unfunded lending commitments which can generally be canceled by providing notice to the borrower.
55
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 18 – CONTINGENCIES
Litigation and Regulatory Matters
In the ordinary course of business, the Company and its subsidiaries are parties to numerous civil claims and lawsuits and subject to regulatory examinations, investigations, and requests for information. Some of these matters involve claims for substantial amounts. The Company’s experience has shown that the damages alleged by plaintiffs or claimants are often overstated, based on unsubstantiated legal theories, unsupported by facts, and/or bear no relation to the ultimate award that a court might grant. Additionally, the outcome of litigation and regulatory matters and the timing of ultimate resolution are inherently difficult to predict. These factors make it difficult for the Company to provide a meaningful estimate of the range of reasonably possible outcomes of claims in the aggregate or by individual claim. However, on acase-by-case basis, reserves are established for those legal claims in which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company’s financial statements at March 31, 2019 reflect the Company’s current best estimate of probable losses associated with these matters, including costs to comply with various settlement agreements, where applicable. The actual costs of resolving these claims may be substantially higher or lower than the amounts reserved.
For a limited number of legal matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses in excess of related reserves, if any. Management currently estimates these losses to range from $0 to approximately $150 million. This estimated range of reasonably possible losses represents the estimated possible losses over the life of such legal matters, which may span a currently indeterminable number of years, and is based on information available at March 31, 2019. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate. Those matters for which an estimate is not possible are not included within this estimated range; therefore, this estimated range does not represent the Company’s maximum loss exposure. Based on current knowledge, it is the opinion of management that liabilities arising from legal claims in excess of the amounts currently reserved, if any, will not have a material impact on the Company’s financial condition, results of operations, or cash flows. However, in light of the significant uncertainties involved in these matters and the large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s financial condition, results of operations, or cash flows for any given reporting period.
The following is a description of certain litigation and regulatory matters:
Card Association Antitrust Litigation
The Company is a defendant, along with Visa and Mastercard, as well as several other banks, in several antitrust lawsuits challenging their practices. For a discussion regarding the Company’s involvement in this litigation matter, see Note 15, “Guarantees.”
Bickerstaff v. SunTrust Bank
This case was filed in the Fulton County State Court on July 12, 2010, and an amended complaint was filed on August 9, 2010.
Plaintiff asserts that all overdraft fees charged to his account which related to debit card and ATM transactions are actually interest charges and therefore subject to the usury laws of Georgia. Plaintiff has brought claims for violations of civil and criminal usury laws, conversion, and money had and received, and purports to bring the action on behalf of all Georgia citizens who incurred such overdraft fees within the four years before the complaint was filed where the overdraft fee resulted in an interest rate being charged in excess of the usury rate. On April 8, 2013, the plaintiff filed a motion for class certification and that motion was denied but the ruling was later reversed and remanded by the Georgia Supreme Court. On October 6, 2017, the trial court granted plaintiff’s motion for class certification and the decision was affirmed by the Georgia Court of Appeals on March 6, 2019. The Bank filed a petition with the Georgia Supreme Court on April 15, 2019, asking the court to review the decision.
Mutual Funds ERISA Class Action
On March 11, 2011, the Company and certain officers, directors, and employees of the Company were named in a putative class action alleging that they breached their fiduciary duties under ERISA by offering certain STI Classic Mutual Funds as investment options in the Plan. The plaintiffs purport to represent all current and former Plan participants who held the STI Classic Mutual Funds in their Plan accounts from April 2002 through December 2010 and seek to recover alleged losses these Plan participants supposedly incurred as a result of their investment in the STI Classic Mutual Funds. This action is pending in the U.S. District Court for the Northern District of Georgia, Atlanta Division (the “District Court”). Subsequently, plaintiffs’ counsel initiated a substantially similar lawsuit against the Company naming two new plaintiffs. On June 27, 2014,Brown, et al. v. SunTrust Banks, Inc., et al., another putative class action alleging breach of fiduciary duties associated with the inclusion of STI Classic Mutual Funds as investment options in the Plan, was filed in the U.S. District Court for the District of Columbia but then was transferred to the District Court.
After various appeals, the cases were remanded to the District Court. On March 25, 2016, a consolidated amended complaint was filed, consolidating all of these pending actions into one case. The Company filed an answer to the consolidated amended complaint on June 6, 2016. Subsequent to the closing of fact discovery, plaintiffs filed their second amended consolidated complaint on December 19, 2017 which among other things named five new defendants. On January 2, 2018, defendants filed their answer to the second amended consolidated complaint. Defendants’ motion for partial summary judgment was filed on January 12, 2018, and on January 16, 2018 the plaintiffs filed for motion for class certification. Defendants’ motion for partial summary judgment was granted by the District Court on May 2, 2018, which held that all claims prior to March 11, 2005 have been dismissed as well as dismissing three individual defendants from action. On June 27, 2018, the District Court granted the plaintiffs’ motion for class certification. On March 29, 2019, the District Court dismissed RidgeWorth Capital Management, Inc. from the lawsuit. A motion for partial summary judgment as to successor liability and a separate motion for summary judgment seeking dismissal of the remaining claims have been filed by the defendants and are pending.
56
Notes to Consolidated Financial Statements (Unaudited), continued
Intellectual Ventures II v. SunTrust Banks, Inc. and SunTrust Bank
This action was filed in the U.S. District Court for the Northern District of Georgia on July 24, 2013. Plaintiff alleged that SunTrust violated five patents held by plaintiff in connection with SunTrust’s provision of online banking services and other systems and services. Plaintiff seeks damages for alleged patent infringement of an unspecified amount, as well as attorney’s fees and expenses. The matter was stayed on October 7, 2014 pendinginter partes reviews of a number of the claims asserted against SunTrust. After completion of those reviews, plaintiff dismissed its claims regarding four of the five patents on August 1, 2017. On February 26, 2019, plaintiff dismissed all of its remaining claims.
Millennium Lender Claim Trust v. STRH and SunTrust Bank, et al.
In August 2017, the Trustee of the Millennium Lender Claim Trust filed a suit in the New York State Court against STRH, the Bank, and other lenders of the $1.775 B Millennium Health LLC f/k/a Millennium Laboratories LLC (“Millennium”) syndicated loan. The Trustee alleges that the loan was actually a security and that defendants misrepresented or omitted to state material facts in the offering materials and communications provided concerning the legality of Millennium’s sales, marketing, and billing practices and the known risks posed by a pending government investigation into the illegality of such practices. The Trustee brings claims for violation of the California Corporate Securities Law, the Massachusetts Uniform Securities Act, the Colorado Securities
Act, and the Illinois Securities Law, as well as negligent misrepresentation and seeks rescission of sales of securities as well as unspecified rescissory damages, compensatory damages, punitive damages, interest, and attorneys’ fees and costs. The defendants removed the case to the U.S. District Court for the Southern District of New York and Trustee’s motion to remand the case back to state court was denied. The defendants filed a motion to dismiss the claims on April 12, 2019.
SunTrust and BB&T Merger Litigation
Following the Merger announcement, five civil actions were filed challenging, among other things, the adequacy of the disclosures contained in the preliminary proxy statement/prospectus filed by BB&T with the SEC in connection with the proposed transaction. Four of these suits were filed by purported SunTrust stockholders against SunTrust and its Board and assert claims under Sections 14(a) and 20(a) of the Exchange Act challenging the adequacy of the public disclosures made concerning the proposed transaction. One of these suits asserts a claim against BB&T under Section 20(a). The fifth suit was filed by a purported BB&T stockholder against BB&T and its board of directors and asserts claims under state law challenging, among other things, the adequacy of the public disclosures made concerning the proposed transaction. The plaintiffs in these actions seek, among other things, an injunction preventing consummation of the proposed transaction, rescission of the proposed transaction or damages in the event it is consummated, and the award of attorneys’ fees and expenses. SunTrust believes the claims asserted in these actions are without merit.
NOTE 19 - BUSINESS SEGMENT REPORTING
The Company operates and measures business activity across two segments: Consumer and Wholesale, with functional activities included in Corporate Other. The Company’s business segment structure is based on the manner in which financial information is evaluated by management as well as the products and services provided or the type of client served.
The following is a description of the segments and their primary businesses at March 31, 2019.
The Consumer segment is made up of three primary businesses:
• | Consumer Banking provides services to individual consumers and business banking clients through an extensive network of traditional andin-store branches, ATMs, online banking (www.suntrust.com), mobile banking, and by telephone(1-800-SUNTRUST). Financial products and services offered to consumers and small business clients include deposits and payments, loans, and variousfee-based services. Consumer Banking also serves as an entry point for clients and provides services for other businesses. |
• | Consumer Lending Solutions offers an array of lending products to individual consumers and business banking clients via the Company’s Consumer Banking and PWM businesses, correspondent channels, the internet (www.suntrust.com andwww.lightstream.com), telephone(1-800-SUNTRUST), as well as through various national offices and partnerships. Products offered include |
mortgages, home equity lines, personal credit lines and loans, direct auto, indirect auto, student lending, credit cards, and other lending products. Mortgage products are either sold in the secondary market, generally with servicing rights retained, or held in the Company’s LHFI portfolio. Consumer Lending Solutions also services mortgage loans for other investors in addition to loans held in the Company’s LHFI portfolio. |
• | PWM provides a full array of wealth management products and professional services to individual consumers and institutional clients, including loans, deposits, brokerage, professional investment advisory, and trust services to clients seeking active management of their financial resources. Institutional clients are served by the Institutional Investment Solutions business. Discount/online and full-service brokerage products are offered to individual clients through STIS. Investment advisory products and services are offered to clients by STAS, an SEC registered investment advisor. PWM also includes GFO Advisory Services, LLC, which provides family office solutions to clients and their families to help them manage and sustain wealth across multiple generations, including family meeting facilitation, consolidated reporting, expense management, specialty asset management, and business transition advice, as well as other wealth management disciplines. |
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Notes to Consolidated Financial Statements (Unaudited), continued
The Wholesale segment is made up of three primary businesses and the Treasury & Payment Solutions product group:
• | CIB delivers comprehensive capital markets solutions, including advisory, capital-raising, and financial risk management, with the goal of serving the needs of both public and private companies in the Wholesale segment and PWM business. Investment Banking and Corporate Banking teams within CIB serve clients across the nation, offering a full suite of traditional banking and investment banking products and services to companies with annual revenues typically greater than $150 million. Investment Banking serves select industry segments including consumer and retail, energy, technology, financial services, healthcare, industrials, and media and communications. Corporate Banking serves clients across diversified industry sectors based on size, complexity, and frequency of capital markets issuance. CIB also includes the Company’s Asset Finance Group, which offers a full complement of asset-based financing solutions such as securitizations, asset-based lending, equipment financing, and structured real estate arrangements. |
• | Commercial Banking offers an array of traditional banking products, including lending, cash management, and investment banking solutions via CIB, to commercial clients (generally clients with revenues between $5 million and $250 million), includingnot-for-profit organizations, governmental entities, healthcare and aging services, and auto dealer financing (floor plan inventory financing). Local teams deliver these solutions along with the Company’s industry expertise to commercial clients to help them achieve smart growth. |
• | Commercial Real Estate provides a range of credit and deposit services as well asfee-based product offerings on a regional delivery basis to privately held developers, operators, and investors in commercial real estate properties through its National Banking Division. Commercial Real Estate also provides multi-family agency lending and servicing, advisory, and commercial mortgage brokerage services via its Agency Lending division. Additionally, Commercial Real Estate offers tailored financing and equity investment solutions for community development and affordable housing projects through STCC, with particular expertise in Low Income Housing Tax Credits and New Market Tax Credits. Real Estate Corporate and Investment Banking targets relationships with REITs and homebuilders, both publicly-traded and privately owned. The Investor Services Group offers loan administration, special servicing, valuation, and advisory services to third party clients. |
• | Treasury & Payment Solutions provides business clients in the Wholesale segment with services required to manage their payments and receipts, combined with the ability to manage and optimize their deposits across all aspects of their business. Treasury & Payment Solutions operates all electronic and paper payment types, including card, wire transfer, ACH, check, and cash. It also provides clients the means to manage their accounts electronically online, both domestically and internationally. |
Corporate Other includes management of the Company’s investment securities portfolio, long-term debt, end user derivative instruments, short-term liquidity and funding activities, balance sheet risk management, and most real estate assets, as well as the Company’s functional activities such as marketing, finance, enterprise risk, legal, enterprise information services, and executive management, among others.
Because business segment results are presented based on management accounting practices, the transition to the consolidated results prepared under U.S. GAAP creates certain differences, which are reflected in reconciling items. Business segment reporting conventions are described below.
• | Net interestincome-FTE – is reconciled from Net interest income and isgrossed-up on an FTE basis to make income fromtax-exempt assets comparable to other taxable products. Segment results reflect matched maturity funds transfer pricing, which ascribes credits or charges based on the economic value or cost created by assets and liabilities of each segment. Differences between these credits and charges are captured as reconciling items. |
• | Provision for credit losses – represents net charge-offs by segment combined with an allocation to the segments for the provision attributable to each segment’s quarterly change in the ALLL and unfunded commitments reserve balances. |
• | Noninterest income – includes federal and state tax credits that aregrossed-up on apre-tax equivalent basis, related primarily to certain community development investments. |
• | Provision for incometaxes-FTE – is calculated using a blended income tax rate for each segment and includes reversals of the tax adjustments and credits described above. The difference between the calculated provision for income taxes at the segment level and the consolidated provision for income taxes is reported as reconciling items. |
The segment’s financial performance is comprised of direct financial results and allocations for various corporate functions that provide management an enhanced view of the segment’s financial performance. Internal allocations include the following:
• | Operational costs – expenses are charged to segments based on an activity-based costing process, which also allocates residual expenses to the segments. Generally, recoveries of these costs are reported in Corporate Other. |
• | Support and overhead costs – expenses not directly attributable to a specific segment are allocated based on various drivers (number of equivalent employees, number of PCs/laptops, net revenue, etc.). Recoveries for these allocations are reported in Corporate Other. |
The application and development of management reporting methodologies is an active process and undergoes periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment, with no impact on consolidated results. If significant changes to management reporting methodologies take place, the impact of these changes is quantified and prior period information is revised, when practicable.
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Notes to Consolidated Financial Statements (Unaudited), continued
Three Months Ended March 31, 2019 | ||||||||||||||||||||
(Dollars in millions) | Consumer | Wholesale | Corporate Other | Reconciling Items | Consolidated | |||||||||||||||
Balance Sheets: | ||||||||||||||||||||
Average LHFI | $78,683 | $75,488 | $88 | ($1 | ) | $154,258 | ||||||||||||||
Average consumer and commercial deposits | 112,245 | 47,850 | 259 | (433 | ) | 159,921 | ||||||||||||||
Average total assets | 88,033 | 90,122 | 37,822 | 1,426 | 217,403 | |||||||||||||||
Average total liabilities | 113,180 | 54,384 | 25,720 | (347 | ) | 192,937 | ||||||||||||||
Average total equity | — | — | — | 24,466 | 24,466 | |||||||||||||||
Statements of Income: | ||||||||||||||||||||
Net interest income | $1,076 | $546 | ($78 | ) | $— | $1,544 | ||||||||||||||
FTE adjustment | — | 22 | 1 | — | 23 | |||||||||||||||
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Net interestincome-FTE1 | 1,076 | 568 | (77 | ) | — | 1,567 | ||||||||||||||
Provision for credit losses2 | 83 | 70 | — | — | 153 | |||||||||||||||
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Net interest income after provision for creditlosses-FTE | 993 | 498 | (77 | ) | — | 1,414 | ||||||||||||||
Total noninterest income | 446 | 364 | 19 | (45 | ) | 784 | ||||||||||||||
Total noninterest expense | 1,017 | 462 | 14 | (4 | ) | 1,489 | ||||||||||||||
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Income before provision for incometaxes-FTE | 422 | 400 | (72 | ) | (41 | ) | 709 | |||||||||||||
Provision for incometaxes-FTE3 | 96 | 95 | (24 | ) | (40 | ) | 127 | |||||||||||||
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Net income including income attributable to noncontrolling interest | 326 | 305 | (48 | ) | (1 | ) | 582 | |||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | 2 | — | 2 | |||||||||||||||
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Net income | $326 | $305 | ($50 | ) | ($1 | ) | $580 | |||||||||||||
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1 Presented on a matched maturity funds transfer price basis for the segments. 2 Provision for credit losses represents net charge-offs by segment combined with an allocation to the segments for the provision attributable to quarterly changes in the ALLL and unfunded commitment reserve balances. 3 Includes regular provision for income taxes as well as FTE income and tax credit adjustment reversals.
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Three Months Ended March 31, 20181 | ||||||||||||||||||||
(Dollars in millions) | Consumer | Wholesale | Corporate Other | Reconciling Items | Consolidated | |||||||||||||||
Balance Sheets: | ||||||||||||||||||||
Average LHFI | $74,840 | $68,000 | $84 | ($4 | ) | $142,920 | ||||||||||||||
Average consumer and commercial deposits | 109,469 | 49,687 | 197 | (184 | ) | 159,169 | ||||||||||||||
Average total assets | 84,272 | 81,726 | 35,680 | 2,454 | 204,132 | |||||||||||||||
Average total liabilities | 110,341 | 55,499 | 13,864 | (177 | ) | 179,527 | ||||||||||||||
Average total equity | — | — | — | 24,605 | 24,605 | |||||||||||||||
Statements of Income: | ||||||||||||||||||||
Net interest income | $998 | $514 | ($30 | ) | ($41 | ) | $1,441 | |||||||||||||
FTE adjustment | — | 20 | 1 | (1 | ) | 20 | ||||||||||||||
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Net interestincome-FTE2 | 998 | 534 | (29 | ) | (42 | ) | 1,461 | |||||||||||||
Provision/(benefit) for credit losses3 | 58 | (30 | ) | — | — | 28 | ||||||||||||||
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Net interest income after provision/(benefit) for creditlosses-FTE | 940 | 564 | (29 | ) | (42 | ) | 1,433 | |||||||||||||
Total noninterest income | 450 | 340 | 38 | (32 | ) | 796 | ||||||||||||||
Total noninterest expense | 1,001 | 450 | (29 | ) | (5 | ) | 1,417 | |||||||||||||
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Income before provision for incometaxes-FTE | 389 | 454 | 38 | (69 | ) | 812 | ||||||||||||||
Provision for incometaxes-FTE4 | 87 | 107 | 16 | (43 | ) | 167 | ||||||||||||||
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Net income including income attributable to noncontrolling interest | 302 | 347 | 22 | (26 | ) | 645 | ||||||||||||||
Less: Net income attributable to noncontrolling interest | — | — | 2 | — | 2 | |||||||||||||||
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Net income | $302 | $347 | $20 | ($26 | ) | $643 | ||||||||||||||
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1 | During the second quarter of 2018, certain of the Company’s business banking clients were transferred from the Wholesale business segment to the Consumer business segment. For all periods prior to the second quarter of 2018, the corresponding financial results have been transferred to the Consumer business segment for comparability purposes. |
2 | Presented on a matched maturity funds transfer price basis for the segments. |
3 | Provision/(benefit) for credit losses represents net charge-offs by segment combined with an allocation to the segments for the provision/(benefit) attributable to quarterly changes in the ALLL and unfunded commitment reserve balances. |
4 | Includes regular provision for income taxes as well as FTE income and tax credit adjustment reversals. |
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Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 20 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in the components of AOCI, net of tax, are presented in the following table:
(Dollars in millions) | Securities AFS | Derivative Instruments | Brokered Time Deposits | Long-Term Debt | Employee Benefit Plans | Total | ||||||||||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||||||
Balance, beginning of period | ($357 | ) | ($368 | ) | $1 | ($1 | ) | ($695 | ) | ($1,420 | ) | |||||||||||||
Net unrealized gains/(losses) arising during the period | 377 | 46 | (1 | ) | (1 | ) | — | 421 | ||||||||||||||||
Amounts reclassified to net income | — | 30 | — | — | 3 | 33 | ||||||||||||||||||
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Other comprehensive income/(loss), net of tax | 377 | 76 | (1 | ) | (1 | ) | 3 | 454 | ||||||||||||||||
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Balance, end of period | $20 | ($292 | ) | $— | ($2 | ) | ($692 | ) | ($966 | ) | ||||||||||||||
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Three Months Ended March 31, 2018 | ||||||||||||||||||||||||
Balance, beginning of period | ($1 | ) | ($244 | ) | ($1 | ) | ($4 | ) | ($570 | ) | ($820 | ) | ||||||||||||
Cumulative effect adjustment related to ASU adoption 1 | 30 | (56 | ) | — | (1 | ) | (127 | ) | (154 | ) | ||||||||||||||
Net unrealized (losses)/gains arising during the period | (424 | ) | (125 | ) | 1 | 2 | (5 | ) | (551 | ) | ||||||||||||||
Amounts reclassified to net income | (1 | ) | 1 | — | — | 3 | 3 | |||||||||||||||||
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Other comprehensive (loss)/income, net of tax | (425 | ) | (124 | ) | 1 | 2 | (2 | ) | (548 | ) | ||||||||||||||
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Balance, end of period | ($396 | ) | ($424 | ) | $— | ($3 | ) | ($699 | ) | ($1,522 | ) | |||||||||||||
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1 | Related to the Company’s early adoption of ASU2018-02 on January 1, 2018. See Note 1, “Significant Accounting Policies,” to the Company’s 2018 Annual Report on Form10-K for additional information. |
Reclassifications from AOCI to Net income, and the related tax effects, are presented in the following table:
(Dollars in millions) | Three Months Ended March 31 | Impacted Line Item in the Consolidated Statements of | ||||||||
Details About AOCI Components | 2019 | 2018 | Income | |||||||
Securities AFS: | ||||||||||
Net realized (gains)/losses on securities AFS | $— | ($1) | Net securities gains/(losses) | |||||||
Tax effect | — | — | Provision for income taxes | |||||||
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Net realized losses on cash flow hedges | 39 | 1 | Interest and fees on loans held for investment | |||||||
Tax effect | (9) | — | Provision for income taxes | |||||||
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Amortization of prior service credit | (2) | (2) | Employee benefits | |||||||
Amortization of actuarial loss | 6 | 6 | Employee benefits | |||||||
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Total reclassifications from AOCI to net income | $33 | $3 | ||||||||
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