VIA EDGAR Securities and Exchange Commission Division of Corporation Finance Mail Stop 4561 100 F Street, N.E. Washington, D.C. 20549 | |
Attention: Ms. Stephanie J. Ciboroski |
Comment 1 | We note your disclosure that you continue to be proactive in your credit monitoring and management processes to provide early warning of problem loans. However, we were unable to locate any additional disclosure relating to potential problems loans you hold at period end, including a description of the nature and extent of such loans that are not otherwise disclosed in your filing as nonaccrual loans, loans over 90-days and still accruing or troubled debt restructurings. Please review future interim and annual filings to provide this information or, alternatively if you do not hold potential problem loans at any period end that are not otherwise disclosed, please ensure your revised disclosure also specifically addresses any known information about possible credit problems of the borrowers. Refer to Item III.C.2 of Industry Guide 3 for guidance. |
Response: | In response to the Staff's comment, the Company has included the following disclosure in our Form 10-Q for the quarter ended March 31, 2012 within MD&A, subsection “Nonperforming Assets” to reference the disclosure of problem loans and loans with potential credit problems. We will include a similar disclosure in future filings. |
Comment 2 | We noted based on footnote one to your table that your table of contractual obligations excludes the related interest expense on your long-term debt obligations and time deposits, which appears to be quite significant based on your disclosure on page 100 of interest expense on your long-term debt and interest-bearing deposits and based on your disclosure of cash paid during the year for interest on your consolidated statements of cash flows. Please revise this table in future filings to include estimated interest payment on your long-term debt and interest-bearing deposits and disclose any assumptions you made to derive these amounts. Please ensure that your estimated interest payments consider any fixed interest rate payments on your interest rate swaps or similar derivatives you use to manage interest rate risk on your long-term debt. |
Response: | While future obligations for interest payments for long-term obligations, including time deposits, are expected to be significant, Item 303(a)(5) of Regulation S-K requires only known long-term debt obligation payments as of the balance sheet date be reported. “Long-Term Debt Obligation” is defined as a payment obligation under long-term borrowings referenced in FASB ASC paragraph 470-10-50-1, which requires that “the combined aggregate amount of maturities...for all long-term borrowings…be disclosed for each of the five years following the date of the latest balance sheet presented.” We believe this requirement does not include estimated interest payments that are incurred with the passage of time and thus may never be paid should the debt be repaid prior to maturity or the deposit attrite. |
• | Consolidated Financial Results (Page 35) - Average yield paid |
• | Management's Discussion and Analysis Liquidity Risk discussion (Pages 79-81) |
• | Consolidated Financial Statements Note 12 Long-Term Debt and Contractual Commitments (Pages 139-140) - Ranges of rates and maturities and discussion of terms relating to new issuances during the period. |
Comment 3 | We note your disclosure that other direct and indirect consumer loans, as well as residential mortgages, residential construction and home equity products are moved to nonaccrual status once they become 60 days past due. Please tell us why these loans are moved to nonaccrual status rather than charged-off or charged-down to their collateral values less cost to sell at the time of notification of the bankruptcy filing. |
Response: | SunTrust follows Federal Financial Institutions Examination Council (FFIEC) guidance and industry practice for the write-down and charge-off of loans in bankruptcy. FFIEC guidance calls for the write-down or charge-off within 60 days of notification of bankruptcy. For real estate loans, secured direct consumer loans, and indirect consumer loans the secured asset is evaluated once the loan becomes 60 days past due when the borrower is in bankruptcy. The loan value in excess of the secured asset value is written down or charged-off after the valuation occurs. For unsecured loans, the loan is charged-off in the month it becomes 60 days past due when the borrower is in bankruptcy. SunTrust's practice of reviewing loans in bankruptcy at 60 days past due is a common industry practice and consistent with FFIEC guidance as it allows borrowers to reaffirm the debt and/or demonstrate their willingness and ability to repay the loan. |
Comment 4 | We note your disclosure that you have pledged $770 million and $823 million of certain trading assets and cash equivalents to secure $747 million and $793 million of repurchase agreements as of December 31, 2011 and 2010, respectively. Please tell us whether the transferee has the right by contract or custom to repledge the collateral. If so, in future filings, please disclose these amounts in the statement of financial position separately from other assets not so encumbered as required by ASC 860-30-45-1. |
Response: | In many cases, the transferee has the right to repledge the pledged collateral referenced in the question above. As of March 31, 2012 and December 31, 2011, encumbered securities included in trading assets were $520,351,896 and $574,398,589, respectively. Thus, we included in our Form 10-Q for the quarter ended March 31, 2012, the amount of encumbered securities included in trading assets as a parenthetical disclosure on the face of the statement of financial position and will include similar disclosure in future filings. |
Comment 5 | We note your disclosure that you have pledged AFS securities to secure public deposits, repurchase agreements, trusts, and other funds, with a fair value of $9.1 billion and $6.9 billion as of December 31, 2011 and 2010, respectively, as well as your shares of Coke common stock. Please tell us whether the transferee has the right by contract or custom to repledge the collateral. If so, in future filings, please disclose these amounts in the statement of financial position separately from other assets not so encumbered as required by ASC 860-30-45-1. |
Response: | As of December 31, 2011 and 2010, there were no pledges of Securities AFS, including our shares of Coke common stock, under which the transferee had the right by either contract or custom to repledge the collateral. If, in the future, the transferee can repledge collateral, we will disclose these amounts in the statement of financial position by parenthetical disclosure on the face of the statement of financial position as required by ASC 860-30-45-1. Additionally, we included in our Form 10-Q for the quarter ended March 31, 2012 the following statement in the notes to our financial statements, As of March 31, 2012 and December 31, 2011, there were no securities AFS pledged under which the transferee may repledge the collateral, and will include similar disclosure in future filings, as appropriate. |
Comment 6 | We note footnotes 5 and 6 to the Notional and Fair Value of Derivative Positions table on page 159 state that futures contracts are settled in cash daily with the exchange, and as a result there are no balance sheet amounts recognized. Please clarify for us whether you actually close-out your futures transactions on a daily basis or whether these represent open transactions that are fully collateralized with the exchange. If the latter is true, please tell us if the gross fair value of these positions are either disclosed in this table or in your fair value hierarchy table on page 171 and if not provide your analysis of the guidance in ASC 820-10-50-3 and ASC 815-10-50-4B supporting your presentations. |
Response: | SunTrust trades fixed income and equity futures on various exchanges. These futures are cleared via our prime brokerage relationships. On a daily basis, SunTrust net settles its prior day futures' valuation changes with its prime brokers in cash. |
Comment 7 | We note your disclosure in footnote one to the Impact of Derivatives on the Consolidated Statements of Income/(Loss) and Shareholders' Equity table on page 161 that you reclassified $202 million in pre-tax gains from AOCI into net interest income related to hedging relationships that have been previously terminated or de-designated. We also note that you reclassified $130 million related to this in 2010 and $31 million in 2009. Please respond to the following: |
• | Tell us the hedge items that these amounts relate to, and the reasons the amounts are being reclassified into earnings. |
• | Tell us whether the same hedged items are driving the reclassifications during each of these three years. |
• | Tell us the amount remaining in AOCI that has yet to reclassified into earnings and your estimate of when these reclassifications will occur. |
Response: | SunTrust maintains a cash flow hedge program whereby pay float interest rate swaps are used to hedge the exposure to the benchmark interest rate risk associated with floating rate commercial loans. From time to time, SunTrust may choose to terminate or de-designate a hedging relationship in this program due to a change in the risk management objective for that specific hedged item that generally arises in conjunction with an overall balance sheet management strategy. In accordance with ASC 815-30-40-1, an entity shall discontinue prospectively the accounting specified in paragraphs 815-30-35-3 and 815-30-35-38 for an existing hedge if the derivative instrument expires or is sold, terminated, or exercised or if the entity removes the designation of the cash flow hedge. Further, ASC 815-30-40-2 states that in those circumstances, the net gain or loss shall remain in accumulated other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings unless the forecasted transactions are probable of not occurring. If probable of not occurring, all amounts in AOCI would be immediately reclassified into earnings. SunTrust's hedged forecasted transactions are the interest income receipts of commercial loans; all of which continue to be probable of occurring, and therefore, no amounts have been immediately reclassified into earnings. |
Comment 8 | We note your disclosure on page 168 that provides a roll-forward of your mortgage repurchase liabilities. Please revise your future filings to provide a breakout of the repurchase provision between additions due to changes in estimates related to prior sales versus increases resulting from new sales of loans during the period. In your response, please provide us with a revised roll-forward with this information. |
Response: | The roll-forward including the requested revision is shown below. Based upon the immaterial amount of provision due to new sales, we have not separately disclosed the provision related to new sales in our Form 10-Q for the quarter ended March 31, 2012. However, we will continue to monitor the amount and disclose this amount, if it becomes material, in future filings. |
($ in millions) | 2009 | 2010 | 1Q 2011 | 2011 | 1Q 2012 | ||||||||||
Reserve at beginning of period | $92 | $200 | $265 | $265 | $320 | ||||||||||
New sales | 15 | 7 | 1 | 6 | 2 | ||||||||||
Prior sales | 429 | 449 | 79 | 496 | 173 | ||||||||||
Repurchase provision | 444 | 456 | 80 | 502 | 175 | ||||||||||
Charge-offs | (336 | ) | (391 | ) | (75 | ) | (447 | ) | (112 | ) | |||||
Reserve at end of period | $200 | $265 | $270 | $320 | $383 |
Comment 9 | We note your disclosure on page 178 that the primary drivers of the fair values of derivative instruments are the underlying variables, such as interest rates, exchange rates, equity, or credit and you use market-based assumptions for all of the significant inputs, such as interest rate yield curves, quoted exchange rates and spot prices, market implied volatilities and credit curves. In the next paragraph you state that credit valuation adjustments for your derivative counterparties you use a proprietary internal risk rating system that utilizes counterparty-specific probabilities of default and loss given default (LGD) estimates. Please clarify how credit valuation adjustments are derived (credit curves versus internal risk rating systems) as the two sentences appear to be inconsistent in terms of your methodology used. |
Response: | For the market valuation of the credit derivative contracts that comprise our credit derivatives portfolio, we use the credit curve for the underlying company in valuing the specific asset as the credit curve is the primary market pricing mechanism. As of March 31, 2012, the aggregate fair value of all of SunTrust's written and purchased credit default swaps were approximately $1.0 million and $2.9 million, respectively. |
• | The vast number of our derivatives counterparties (our clients) do not have public credit data as they are either not listed nor do they have any broadly traded securities. Outside of our dealer counterparties, with whom we engage in hedging activity on a collateralized basis, our derivatives counterparties broadly consists of wholesale and diversified commercial clients, including commercial real estate and private wealth clients, which do not have publicly traded credit instruments. |
• | The ongoing assignment and updating of the company specific PD and LGD estimates require that our credit officers consider market-based data, when available, industry specific data, company specific data, as well as other data points. In addition, the regular updates of these ratings result in a point in time estimate that provides us with the best estimate of the counterparty credit risk. |
• | We do not believe market-based data is solely determinative for purposes of valuing counterparty credit risk as it can include measures unrelated to credit risk. Further, market based curves have a different construct than our transactions with counterparties that have public data available in that the vast majority of our trades are fully or partially collateralized or secured. However, where available, market-based data is factored into our PD and LGD estimates, as described above. |
• | Transfers or sales of derivatives contracts after origination are infrequent for our client base. Thus, there is not a significant amount of public data regarding how market participants would price such transactions. In the absence of such data, we believe a counterparty credit risk valuation estimate using PD and LGD that is incremental to the valuation of the derivative contract is a reasonable estimate of how market participants would price such transactions. The process of pricing derivatives transactions at origination can vary but involves detailed assessment of the particular trade structure and counterparty, which may include referencing publicly traded instruments if available, observations of prevailing market prices for the particular structure/credit, and internal model calculations which is generally consistent with how our counterparty credit risk adjustment is derived using our internal risk rating approach. |
Comment 10 | On your earnings call you noted that several banks this quarter had reclassified into non-performing loans, performing home equity lines that are behind delinquent first mortgages, but based upon your existing accounting policies and practices, you did not believe it was necessary to make a similar reclassification. With respect to these loans, please address the following: |
• | Please quantify the amount of junior lien loans that are performing but are behind delinquent first mortgages serviced by you or another party. To the extent that you do not have direct information about the delinquency status of a portion of the first mortgages that exist ahead of your junior lien, please tell us whether you considered declines in FICO score as an indication of the delinquency status of the first mortgages. |
Response: | We included the following disclosure, which we believe answers the Staff's question, within the MD&A, "Loans" subsection of our Form 10-Q for the quarter ended March 31, 2012. |
• | Tell us your reasons for not reclassifying these loans and whether you considered the regulatory guidance issued in January 2012, “Interagency Supervisory Guidance on Allowance for Loan and Lease Losses Estimation Practices for Loans and Lines for Credit Secured by Junior Liens on 1-4 Family Residential Properties.” |
Response: | The January 2012 guidance states, “Institutions also should ensure that income recognition practices related to junior liens are appropriate. Consistent with GAAP and regulatory guidance, institutions are expected to have revenue recognition practices that do not result in overstating income. Placing a junior lien on nonaccrual, including a current junior lien, when payment of principal or interest in full is not expected is one appropriate method to ensure income is not overstated….” |
• | Tell us how this sub-category of junior liens would be reflected under your existing non-performing loan policies. For example, we note that you had total non-performing home equity products in the mid $300 million range for each of the three years ended December 31, 2011. Tell us whether any of these loans balances were classified as non-performing loans even though your junior lien was current and performing. |
Response: | SunTrust policy is to place home equity loans on nonaccrual at 90 days past due and at 60 days past due if bankruptcy notification has been received. Thus, the sub-category of home equity junior liens that are current or early stage delinquent are substantially all classified as accruing. |
• | You also noted on the call that if you were ever requested or required to put the current performing loans into a non-performing category that you would not expect the income statement impact to be material. Please tell us if the potential reclassification would have a material effect on your credit quality ratios (e.g., coverage ratio, NPLs to total loans, etc.), and please quantify. |
Response: | A reclassification of current accruing junior liens subordinate to nonperforming senior liens would not impact our Allowance for Loan and Lease Losses (ALLL) estimate given the frequency in which FICO scores are refreshed. A reclassification of the accruing junior liens would increase the balance of NPLs an estimated $110 million to $175 million, or 4% - 7%. |
• | The Company is responsible for the adequacy and accuracy of the disclosure in the filing; |
• | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
• | The Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
cc: | Mr. Tom Watjen |