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SunTrust Banks 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-08918

 

 

SUNTRUST BANKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1575035

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

303 Peachtree Street, N.E., Atlanta, Georgia 30308

(Address of pricipal executive offices)    (Zip Code)

(404) 588-7711

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At April 30, 2009, 356,804,038 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding.

 

 

 


Table of Contents

Tables of Contents

 

PART I FINANCIAL INFORMATION

  
          Page

Item 1.

  

Financial Statements (Unaudited)

   3
  

Consolidated Statements of Income

   3
  

Consolidated Balance Sheets

   4
  

Consolidated Statements of Shareholders’ Equity

   5
  

Consolidated Statements of Cash Flows

   6
  

Notes to Consolidated Financial Statements

   7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   45

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   85

Item 4.

  

Controls and Procedures

   85

PART II OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   86

Item 1A.

  

Risk Factors

   86

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   86

Item 3.

  

Defaults Upon Senior Securities

   87

Item 4.

  

Submission of Matters to a Vote of Security Holders

   87

Item 5.

  

Other Information

   87

Item 6.

  

Exhibits

   88

SIGNATURES

   89

PART I – FINANCIAL INFORMATION

The following unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary to comply with Regulation S-X have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the full year of 2009.

 

2


Table of Contents

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

SunTrust Banks, Inc.

Consolidated Statements of Income

 

     For the Three Months Ended
March 31
(Dollars in thousands, except per share data) (Unaudited)    2009    2008

Interest Income

     

  Interest and fees on loans

     $1,412,885        $1,854,646  

  Interest and fees on loans held for sale

   61,832      99,009  

  Interest and dividends on securities available for sale

     

    Taxable interest

   181,202      152,903  

    Tax-exempt interest

   10,699      11,303  

    Dividends1

   18,162      33,925  

  Interest on funds sold and securities purchased under agreements to resell

   937      8,947  

  Interest on deposits in other banks

   113      247  

  Trading account interest

   43,505      97,352  
         

      Total interest income

   1,729,335      2,258,332  
         

Interest Expense

     

  Interest on deposits

   423,873      747,820  

  Interest on funds purchased and securities sold under agreements to repurchase

   2,733      56,949  

  Interest on trading liabilities

   6,160      6,050  

  Interest on other short-term borrowings

   5,155      22,776  

  Interest on long-term debt

   229,316      284,870  
         

      Total interest expense

   667,237      1,118,465  
         

Net interest income

   1,062,098      1,139,867  

Provision for loan losses

   994,098      560,022  
         

      Net interest income after provision for loan losses

   68,000      579,845  
         

Noninterest Income

     

  Service charges on deposit accounts

   206,394      211,839  

  Trust and investment management income

   116,010      161,102  

  Other charges and fees

   124,321      127,231  

  Card fees

   75,660      73,761  

  Retail investment services

   56,713      72,300  

  Investment banking income

   59,534      55,420  

  Mortgage production related income

   250,470      85,549  

  Mortgage servicing related income

   83,352      29,098  

  Trading account profits and commissions

   107,293      28,218  

  Net gain on extinguishment of debt

   25,304      -  

  Net gain on sale of business

   -      89,390  

  Gain on Visa IPO

   -      86,305  

  Net gain on sale/leaseback of premises

   -      37,039  

  Other noninterest income

   38,114      60,836  

  Net securities gains/(losses)

   3,377      (60,586) 
         

      Total noninterest income

   1,146,542      1,057,502  
         

Noninterest Expense

     

  Employee compensation

   573,022      584,790  

  Employee benefits

   163,030      130,293  

  Outside processing and software

   138,361      109,165  

  Operating losses

   22,621      30,263  

  Marketing and customer development

   34,725      55,703  

  Net occupancy expense

   87,417      86,441  

  Equipment expense

   43,540      52,395  

  Mortgage reinsurance

   70,039      7,011  

  Amortization/impairment of goodwill/intangible assets

   767,016      20,715  

  Net loss on extinguishment of debt

   -      11,723  

  Visa litigation

   -      (39,124) 

  Other noninterest expense

   277,556      202,858  
         

      Total noninterest expense

   2,177,327      1,252,233  
         

    Income/(loss) before provision/(benefit) for income taxes

   (962,785)     385,114  

Provision/(benefit) for income taxes

   (150,777)     91,648  
         

    Net income/(loss) including income attributable to noncontrolling interest

   (812,008)     293,466  

Net income attributable to noncontrolling interest

   3,159      2,911  
         

    Net income/(loss)

   (815,167)     290,555  

Series A preferred dividends

   5,000      6,977  

U.S. Treasury preferred dividends

   66,279      -  

Dividends and undistributed earnings allocated to unvested shares

   (11,065)     2,023  
         

    Net Income/(Loss) Available to Common Shareholders

   ($875,381)     $281,555  
         

Net income per average common share

     

        Diluted

   ($2.49)     $0.81  

        Basic

   (2.49)     0.81  

Dividends declared per common share

   0.10      0.77  

Average common shares - diluted

   351,352      348,072  

Average common shares - basic

   351,352      346,581  

1 Includes dividends on common stock of The Coca-Cola Company

   $12,300      $16,560  

See Notes to Consolidated Financial Statements (unaudited).

 

3


Table of Contents

SunTrust Banks, Inc.

Consolidated Balance Sheets

 

     As of
(Dollars in thousands) (Unaudited)    March 31
2009
   December 31
2008

Assets

     

Cash and due from banks

   $5,825,730      $5,622,789  

Interest-bearing deposits in other banks

   25,282      23,999  

Funds sold and securities purchased under agreements to resell

   1,209,987      990,614  
         

Cash and cash equivalents

   7,060,999      6,637,402  

Trading assets

   7,397,338      10,396,269  

Securities available for sale1

   19,485,406      19,696,537  

Loans held for sale (loans at fair value: $5,224,353 as of March 31, 2009; $2,424,432 as of December 31, 2008)

   6,954,038      4,032,128  

Loans (loans at fair value: $242,193 as of March 31, 2009; $270,342 as of December 31, 2008)

   123,892,966      126,998,443  

Allowance for loan and lease losses

   (2,735,000)     (2,350,996) 
         

Net loans

   121,157,966      124,647,447  

Premises and equipment

   1,546,600      1,547,892  

Goodwill

   6,309,431      7,043,503  

Other intangible assets (mortgage servicing rights at fair value: $308,296 as of March 31, 2009; $0 as of December 31, 2008)

   1,103,333      1,035,427  

Customers’ acceptance liability

   6,290      5,294  

Other real estate owned

   593,579      500,481  

Unsettled sales of securities available for sale

   2,998      6,386,795  

Other assets

   7,498,424      7,208,786  
         

Total assets

   $179,116,402      $189,137,961  
         

Liabilities and Shareholders’ Equity

     

Noninterest-bearing consumer and commercial deposits

   $24,371,518      $21,522,021  

Interest-bearing consumer and commercial deposits

   88,077,195      83,753,686  
         

Total consumer and commercial deposits

   112,448,713      105,275,707  

Brokered deposits (CDs at fair value: $583,976 as of March 31, 2009; $587,486 as of December 31, 2008)

   6,373,500      7,667,167  

Foreign deposits

   149,962      385,510  
         

Total deposits

   118,972,175      113,328,384  

Funds purchased

   1,567,406      1,120,079  

Securities sold under agreements to repurchase

   3,165,644      3,193,311  

Other short-term borrowings (debt at fair value: $0 as of March 31, 2009; $399,611 as of December 31, 2008)

   2,883,384      5,166,360  

Long-term debt (debt at fair value: $3,352,400 as of March 31, 2009; $7,155,684 as of December 31, 2008)

   23,029,842      26,812,381  

Acceptances outstanding

   6,290      5,294  

Trading liabilities

   3,050,628      3,240,784  

Unsettled purchases of securities available for sale

   -      8,898,279  

Other liabilities

   4,795,407      4,872,284  
         

Total liabilities

   157,470,776      166,637,156  
         

Preferred stock

   5,227,357      5,221,703  

Common stock, $1.00 par value

   372,799      372,799  

Additional paid in capital

   6,713,536      6,904,644  

Retained earnings

   9,466,914      10,388,984  

Treasury stock, at cost, and other

   (1,168,995)     (1,368,450) 

Accumulated other comprehensive income, net of tax

   1,034,015      981,125  
         

Total shareholders’ equity

   21,645,626      22,500,805  
         

Total liabilities and shareholders’ equity

     $179,116,402        $189,137,961  
         

Common shares outstanding

   356,693,099      354,515,013  

Common shares authorized

   750,000,000      750,000,000  

Preferred shares outstanding

   53,500      53,500  

Preferred shares authorized

   50,000,000      50,000,000  

Treasury shares of common stock

   16,106,270      18,284,356  

1 Includes net unrealized gains on securities available for sale

   $1,492,517      $1,413,330  

See Notes to Consolidated Financial Statements (unaudited).

 

4


Table of Contents

SunTrust Banks, Inc.

Consolidated Statements of Shareholders’ Equity

 

(Dollars and shares in thousands, except
per share data) (Unaudited)
  Preferred
Stock
  Common
Shares
Outstanding
  Common
Stock
  Additional
Paid in
Capital
  Retained
Earnings
  Treasury
Stock and
Other1
  Accumulated
Other
Comprehensive
Income
  Total

Balance, January 1, 2008

    $500,000     348,411     $370,578     $6,707,293     $10,646,640     ($1,661,719)    $1,607,149     $18,169,941  

Net income

  -     -     -     -     290,555     -     -     290,555  

Other comprehensive income:

               

Change in unrealized gains (losses) on securities, net of taxes

  -     -     -     -     -     -     101,795     101,795  

Change in unrealized gains (losses) on derivatives, net of taxes

  -     -     -     -     -     -     195,653     195,653  

Change related to employee benefit plans

  -     -     -     -     -     -     4,312     4,312  
                 

Total comprehensive income

                592,315  

Change in noncontrolling interest

  -     -     -     -     -     (268)    -     (268) 

Common stock dividends, $0.77 per share

  -     -     -     -     (268,964)    -     -     (268,964) 

Preferred stock dividends, $1,395.50 per share

  -     -     -     -     (6,977)    -     -     (6,977) 

Exercise of stock options and stock compensation expense

  -     309     -     (2,715)    -     24,933     -     22,218  

Performance and restricted stock activity

  -     590     -     (10,527)    -     10,118     -     (409) 

Amortization of performance and restricted stock compensation

  -     -     -     -     -     10,148     -     10,148  

Issuance of stock for employee benefit plans

  -     522     -     (10,794)    -     41,787     -     30,993  

Other activity

  -     -     -     (429)    (4)    39     -     (394) 
                               

Balance, March 31, 2008

  $500,000     349,832     $370,578     $6,682,828     $10,661,250     ($1,574,962)    $1,908,909     $18,548,603  
                               

Balance, January 1, 2009

  $5,221,703     354,515     $372,799     $6,904,644     $10,388,984     ($1,368,450)    $981,125     $22,500,805  

Net loss

  -     -     -     -     (815,167)    -     -     (815,167) 

Other comprehensive income:

               

Change in unrealized gains (losses) on securities, net of taxes

  -     -     -     -     -     -     48,968     48,968  

Change in unrealized gains (losses) on derivatives, net of taxes

  -     -     -     -     -     -     (18,993)    (18,993) 

Change related to employee benefit plans

  -     -     -     -     -     -     22,915     22,915  
                 

Total comprehensive loss

                (762,277) 

Change in noncontrolling interest

  -     -     -     -     -     (679)    -     (679) 

Common stock dividends, $0.10 per share

  -     -     -     -     (35,621)    -     -     (35,621) 

Series A preferred stock dividends, $1,000.00 per share

  -     -     -     -     (5,000)    -     -     (5,000) 

U.S. Treasury preferred stock dividends, $1,250.00 per share

  -     -     -     -     (60,625)    -     -     (60,625) 

Accretion of discount associated with U.S. Treasury preferred stock

  5,654     -     -     -     (5,654)    -     -     -  

Exercise of stock options and stock compensation expense

  -     -     -     3,285     -     -     -     3,285  

Performance and restricted stock activity

  -     1,658     -     (163,136)    -     138,995     -     (24,141) 

Amortization of performance and restricted stock compensation

  -     -     -     -     -     20,283     -     20,283  

Issuance of stock for employee benefit plans

  -     520     -     (31,257)    (3)    40,856     -     9,596  
                               

Balance, March 31, 2009

        $5,227,357           356,693           $372,799           $6,713,536           $9,466,914           ($1,168,995)          $1,034,015           $21,645,626  
                               

 

1

Balance at March 31, 2009 includes ($1,173,026) for treasury stock, ($107,985) for compensation element of restricted stock, and $112,016 for noncontrolling interest.

Balance at March 31, 2008 includes ($1,571,438) for treasury stock, ($120,679) for compensation element of restricted stock, and $117,155 for noncontrolling interest.

See Notes to Consolidated Financial Statements (unaudited).

 

5


Table of Contents

SunTrust Banks, Inc.

Consolidated Statements of Cash Flows

 

     Three Months Ended March 31
(Dollars in thousands) (Unaudited)    2009    2008

Cash Flows from Operating Activities:

     

Net income/(loss) including income attributable to noncontrolling interest

   ($812,008)     $293,466  

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

     

Net gain on sale of business

   -      (89,390) 

Visa litigation expense reversal

   -      (39,124) 

Depreciation, amortization and accretion

   234,985      219,653  

Impairment of goodwill

   751,156      -  

Recovery of mortgage servicing rights impairment

   (31,298)     -  

Origination of mortgage servicing rights

   (146,290)     (152,303) 

Provisions for loan losses and foreclosed property

   1,026,917      569,513  

Amortization of performance and restricted stock compensation

   20,283      10,148  

Stock option compensation

   3,285      6,167  

Excess tax benefits from stock-based compensation

   (181)     (1,409) 

Net (gain)/loss on extinguishment of debt

   (25,304)     11,723  

Net securities (gains)/losses

   (3,377)     60,586  

Net gain on sale/leaseback of premises

   -      (37,039) 

Net gain on sale of assets

   (6,913)     (19,995) 

Originated and purchased loans held for sale net of principal collected

       (12,825,072)         (10,261,620) 

Sales and securitizations of loans held for sale

   9,887,617      11,925,207  

Contributions to retirement plans

   (1,286)     (1,588) 

Net decrease (increase) in other assets

   736,652      (1,933,721) 

Net decrease in other liabilities

   (547,123)     (106,106) 
         

Net cash (used in) provided by operating activities

   (1,737,957)     454,168  
         

Cash Flows from Investing Activities:

     

Proceeds from maturities, calls and paydowns of securities available for sale

   780,575      314,054  

Proceeds from sales of securities available for sale

   6,488,762      742,398  

Purchases of securities available for sale

   (9,500,312)     (615,082) 

Proceeds from maturities, calls and paydowns of trading securities

   23,577      518,936  

Proceeds from sales of trading securities

   2,009,051      881,265  

Purchases of trading securities

   (85,965)     (118,082) 

Loan repayments/(originations), net

   2,072,094      (1,712,390) 

Proceeds from sales of loans held for investment

   181,379      99,294  

Capital expenditures

   (47,126)     (34,187) 

Net cash and cash equivalents received for sale of business

   -      155,000  

Net cash and cash equivalents paid for acquisitions

   -      (1,540) 

Seix contingent consideration payout

   (12,722)     -  

Proceeds from the sale/leaseback of premises

   -      227,269  

Proceeds from the sale of other assets

   86,023      47,685  
         

Net cash provided by investing activities

   1,995,336      504,620  
         

Cash Flows from Financing Activities:

     

Net increase in consumer and commercial deposits

   6,727,361      1,563,079  

Net decrease in foreign and brokered deposits

   (1,528,931)     (3,225,219) 

Assumption of Omni National Bank deposits, net

   445,482      -  

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

   (1,863,316)     102,028  

Proceeds from the issuance of long-term debt

   574,560      1,159,038  

Repayment of long-term debt

   (4,090,686)     (679,552) 

Proceeds from the exercise of stock options

   -      16,814  

Excess tax benefits from stock-based compensation

   181      1,409  

Common and preferred dividends paid

   (98,433)     (275,941) 
         

Net cash (used in) provided by financing activities

   166,218      (1,338,344) 
         

Net increase (decrease) in cash and cash equivalents

   423,597      (379,556) 

Cash and cash equivalents at beginning of period

   6,637,402      5,642,601  
         

Cash and cash equivalents at end of period

   $7,060,999      $5,263,045  
         

Supplemental Disclosures:

     

Loans transferred from loans held for sale to loans

   $8,565      $227,531  

Loans transferred from loans to other real estate owned

   213,287      116,124  

U.S. Treasury preferred dividends accrued but unpaid

   2,813      -  

Accretion on U.S. Treasury preferred stock

   5,654      -  

See Notes to Consolidated Financial Statements (unaudited).

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the results of operations in these financial statements, have been made. Effective May 1, 2008, SunTrust Banks, Inc. (“SunTrust” or the “Company”) acquired GB&T Bancshares, Inc. (“GB&T”). The acquisition was accounted for under the purchase method of accounting with the results of operations for GB&T included in those of the Company beginning May 1, 2008.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could vary from these estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

These financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2008. Except for accounting policies that have been modified or recently adopted as described below, there have been no significant changes to the Company’s Accounting Policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 requires that a noncontrolling interest in a subsidiary (i.e. minority interest) be reported in the equity section of the balance sheet instead of being reported as a liability or in the mezzanine section between debt and equity. It also requires that the consolidated income statement include consolidated net income attributable to the Company and the noncontrolling interest of a consolidated subsidiary. A disclosure must be made on the face of the consolidated income statement of the net income attributable to the noncontrolling interest. Also, regardless of whether the parent purchases an additional ownership interest, sells a portion of its ownership interest in a subsidiary or the subsidiary participates in a transaction that changes the parent’s ownership interest, as long as the parent retains the controlling interest, the transaction is considered an equity transaction. SFAS No. 160 is effective for annual periods beginning after December 15, 2008. The Company adopted this standard effective January 1, 2009, and in connection therewith, $112.0 million in noncontrolling interest was reclassed from liabilities to equity and $3.2 million was reflected in pre-tax income attributable to noncontrolling interest as of and for the three month period ended March 31, 2009. Reclassifications of $112.7 million were made in the Consolidated Balance Sheet as of December 31, 2008 and $2.9 million in the Consolidated Income Statement for the three month period ended March 31, 2008, to conform to the current period presentation.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which amends SFAS No. 133 and expands the derivative-related disclosure requirements. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures of the fair values of derivative instruments and their gains and losses, and disclosures about credit-risk related contingent features in derivative agreements. The standard also amended SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to clarify the disclosure requirements with respect to derivative counterparty credit risk. SFAS No. 161 is effective for annual and interim periods beginning after November 15, 2008; therefore, the required disclosures have been included in Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities that should be included in the earnings allocation in computing earnings per share under the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share data presented must be adjusted retrospectively. The adoption of this standard, effective January 1, 2009, did not have a material impact on the Company’s financial position and results of operations and earnings per share.

 

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In September 2008, the FASB issued two separate but related exposure drafts for proposed amendments to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and proposed amendments to FASB Interpretation No. (“FIN”) 46(R), “Consolidation of Variable Interest Entities”. The proposed amendments to SFAS No. 140, among other amendments to the sale criteria on SFAS No. 140, eliminate the concept of a qualifying special-purpose entity (“QSPE”) and would require an existing QSPE to be analyzed for consolidation according to FIN 46(R). In addition, the proposed amendments introduce the concept of a “participating interest”, which establishes specific conditions for reporting the transfer of a portion of a financial asset as a sale. The proposed amendments to FIN 46(R) are intended to change the consolidation model for determining which enterprise should consolidate a variable interest entity (“VIE”) from primarily an economic focus to a control and economic focus. Under the proposed amendment, companies must make a qualitative assessment based on control and economic interests to determine the primary beneficiary, if any, of a VIE. The amended statement, if finalized, would be effective for the first interim reporting period of 2010. The Company’s variable interests in a commercial paper conduit, various QSPE’s, and certain other securitization vehicles are expected to be the primary areas of impact; therefore, the Company is evaluating the impact that these proposed amendments will have on its financial statements. As part of its project to amend SFAS No. 140 and FIN 46(R), the FASB issued FSP FAS No. 140-4 and FIN 46(R)–8 in December 2008, which requires enhanced disclosures regarding the extent of a transferor’s continuing involvement with transferred financial assets and the Company’s involvement with VIEs. The required disclosures are included in Note 11, “Certain Transfers of Financial Assets, Mortgage Servicing Rights, and Variable Interest Entities” to the Consolidated Financial Statements contained within the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and as updated by Note 6, “Certain Transfers of Financial Assets, Mortgage Servicing Rights, and Variable Interest Entities,” to these Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The FSP amends the other-than-temporary impairment guidance for debt securities. If the fair value of a debt security is less than its amortized cost basis at the measurement date, the FSP requires the Company to assert whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before its anticipated recovery. If either condition is met, an entity must recognize impairment. The FSP also changes the method of assessing whether the amortized cost basis will be recovered, as the Company is now required to compare the present value of the cash flows expected to be collected to the amortized cost basis of the debt security. Impairment exists if the present value of the cash flows is less than the amortized cost basis. The FSP provides guidance as to measuring the portion of the other-than-temporary impairment that is recognized through earnings or through other comprehensive income. The FSP requires entities to disclose the types of available for sale debt and equity securities held, including information about investments in an unrealized loss position for which an other-than-temporary impairment has or has not been recognized. Entities are also required to disclose the reasons why a portion of an other-than-temporary impairment of a debt security was not recognized in earnings and the methodology and significant inputs used to calculate the portion of the other-than-temporary impairment that was recognized in earnings. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company plans to adopt the standard effective June 30, 2009 and is currently assessing the impact that the FSP will have to its financial position and results of operations.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which provides interpretive guidance around the concept of exit price in SFAS No. 157, “Fair Value Measurement”. Specifically, the FSP provides factors that an entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity for the asset or liability. If an entity concludes that there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of whether transactions have been disorderly is required and significant adjustments to the related prices may be necessary to estimate fair value in accordance with SFAS No. 157. The FSP clarifies that when there has been a significant decline in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those instances, an entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides circumstances that may indicate whether or not a transaction is orderly. In evaluating fair value, an entity should place more weight on orderly transactions and less weight on transactions that the entity concludes are not orderly. The FSP requires entities to disclose the inputs and valuation techniques used to measure fair value and to discuss changes in valuation techniques and related inputs, if any, in both interim and annual periods. The FSP is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009; however, the Company did not elect to early adopt. The Company does not expect the adoption of the standard to have a material impact on its financial position and results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Statements”. This FSP amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and requires an entity to disclose the fair value of its financial instruments in interim reporting periods as well as in annual financial statements. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods and assumptions used

 

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during the reporting period shall also be disclosed. The FSP is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, if an entity also elects to early adopt FSP FAS 157- 4 and FSP 115-2. Because the Company did not early adopt these FSPs, the required disclosures will be included in the interim reporting period ending June 30, 2009.

Note 2 – Acquisitions / Dispositions

 

(in millions)        Date        Cash or other
consideration
    (paid)/ received    
       Goodwill        Other
    Intangibles    
    Gain/
    (Loss)    
  

Comments

For the Three Months Ended March 31, 2008 Sale of 24.9% interest in Lighthouse Investment Partners, LLC (“Lighthouse Investment Partners”)

   1/2/08    155.0    -    (6.0 )   89.4   

 

SunTrust will continue to earn a
revenue share based upon
client referrals to the funds.

No significant acquisitions or dispositions occurred for the three months ended March 31, 2009.

Note 3 – Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses is summarized in the table below:

 

     Three Months Ended
March 31
   %
    Change    
 
(Dollars in thousands)    2009    2008   

Balance at beginning of period

         $ 2,350,996             $ 1,282,504         83.3    %

Provision for loan losses

     994,098         560,022         77.5     

Loan charge-offs

     (646,916)        (322,696)        100.5     

Loan recoveries

     36,822         25,510         44.3     
                

Balance at end of period

         $ 2,735,000             $ 1,545,340         77.0    %
                

Note 4 – Premises and Equipment

During the first quarter of 2008, the Company completed a sale/leaseback transaction, consisting of 143 branch properties and various individual office buildings. In total, the Company sold and concurrently leased back $125.9 million in land and buildings with associated accumulated depreciation of $63.0 million. Net proceeds were $227.3 million, resulting in a gain, net of transaction costs of $164.4 million. The Company recognized $37.0 million of the gain immediately. The remaining $127.4 million in gains were deferred and will be recognized ratably over the expected term of the respective leases, which is 10 years.

Note 5 – Goodwill and Other Intangible Assets

In 2008, the Company’s reporting units were comprised of Retail, Commercial, Commercial Real Estate, Mortgage, Corporate and Investment Banking, Wealth and Investment Management, and Affordable Housing. As discussed in Note 15, “Business Segment Reporting,” to the Consolidated Financial Statements, effective January 1, 2009, the Company made certain changes to the segment reporting structure that resulted in new reportable segment classifications, as well as altered the composition of the Retail and Mortgage reporting units. The Mortgage reporting unit was renamed Household Lending due to the inclusion of the Consumer Lending business, which was previously included in the Retail reporting unit. In connection with this reorganization, the relative fair value of the Retail and Consumer Lending reporting units was estimated and $172.0 million in goodwill related to Consumer Lending was transferred from the Retail reporting unit to the Household Lending reporting unit.

The Company completed its 2008 annual review for goodwill impairment based on information that was as of September 30, 2008. The estimated fair value of each reporting unit as of September 30, 2008 exceeded its respective carrying value; therefore, the Company determined there was no impairment of goodwill as of that date. Under U.S. GAAP, goodwill is required to be tested for impairment on an annual basis or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As a result of continued deterioration in the economy during the fourth quarter of 2008, the Company determined that it was more likely than not that the fair value of the Mortgage, Commercial Real Estate, and Corporate and Investment Banking reporting units was less than their respective carrying value as of December 31, 2008, due to their exposure to residential real estate and capital markets. As a result, the Company performed the second step of the goodwill impairment evaluation, which involved calculating the implied fair value of the goodwill for those reporting units. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit’s

 

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assets and liabilities, including previously unrecognized intangible assets, is individually evaluated. The excess of the fair value of the reporting unit over the fair value of the reporting unit’s net assets is the implied fair value of goodwill. The Company estimated the fair value of each reporting unit’s assets and liabilities, including previously unrecognized intangible assets, through a variety of valuation techniques that incorporated interest rates, credit or nonperformance risk, as well as market risk premiums that are indicative of the current economic environment. The estimated values are based on an exit price and reflect management’s expectations regarding how a market participant would value the assets and liabilities. Based on this analysis, the Company determined that the implied fair value of the goodwill for the reporting units evaluated was in excess of the carrying value of the goodwill for those reporting units; therefore, no goodwill impairment was recorded as of December 31, 2008. This evaluation and resulting conclusion was significantly affected by the estimated fair value of the loans pertaining to the reporting units that were evaluated, particularly the market risk premium that is a consequence of the current distressed market conditions.

Due to the continued recessionary environment and sustained deterioration in the economy during the first quarter of 2009, the Company performed a complete goodwill impairment analysis for all of its reporting units. The estimated fair value of the Retail, Commercial, and Wealth and Investment Management reporting units exceeded their respective carrying values as of March 31, 2009; however, the fair value of the Household Lending, Corporate and Investment Banking, Commercial Real Estate (included in Retail and Commercial segment), and Affordable Housing (included in Retail and Commercial segment) reporting units were less than their respective carrying values. The goodwill impairment analysis estimated fair value using discounted cash flow analyses, as well as guideline company and guideline transaction information, where available. The inputs and assumptions specific to each reporting unit that were incorporated in the valuations included projections of future cash flows, discount rates, the fair value of tangible and intangible assets and liabilities, and applicable valuation multiples based on the guideline information. The Company assessed the reasonableness of the estimated fair value of the reporting units by giving consideration to the Company’s market capitalization over a reasonable period of time; however, due to the significant and unprecedented volatility in market capitalization of the financial institution’s sector, supplemental information was applied based on observable multiples from guideline transactions, adjusting to reflect Company specific factors, as well as current market conditions. In the case of the Commercial Real Estate and Affordable Housing reporting units, fair value was estimated using the cost approach (also known as the asset approach), which was based on the fair value of these reporting unit’s assets and liabilities, including previously unrecognized intangible assets. This approach was determined to be most appropriate due to the likelihood that a market participant would assume negligible going concern value on the long-term cash flow projections and terminal value due to the currently distressed nature of these businesses.

For those reporting units where the fair value was less than carrying value, the implied fair value of goodwill was determined in the same manner used as of December 31, 2008 and as described above. The implied fair value of goodwill of the Corporate and Investment Banking reporting unit exceeded the carrying value of the goodwill, thus no goodwill impairment was recorded for this reporting unit as of March 31, 2009. However, the implied fair value of goodwill applicable to the Household Lending, Commercial Real Estate, and Affordable Housing reporting units was less than the carrying value of the goodwill. As of March 31, 2009, an impairment loss of $751.2 million was recorded, which was the entire amount of goodwill carried by each of those reporting units. Based on the tax nature of the acquisitions that initially generated the goodwill, $677.4 million of the goodwill impairment charge was non-deductible for tax purposes. The goodwill impairment charge was a direct result of continued deterioration in the real estate markets and macro economic conditions that put downward pressure on the fair value of these businesses. The primary factors contributing to the impairment recognition was further deterioration in the actual and projected financial performance of these reporting units, as evidenced by the increase in net charge-offs and nonperforming loans. These declines reflect the current downturn, which resulted in depressed earnings in these businesses and the significant decline in the Company’s market capitalization during the first quarter.

Changes in the carrying amount of goodwill by reportable segment for the three months ended March 31 are as follows:

 

(Dollars in thousands)     Retail       Commercial     Retail
and
  Commercial  
      Wholesale         Corporate  
and
Investment
    Household  
Lending
      Mortgage       Wealth and
Investment
  Management  
    Corporate  
Other and
Treasury
     Total    

Balance, January 1, 2009

  $-   $-   $5,911,990     $522,548     $-   $-     $278,254     $330,711   $-    $7,043,503  

Intersegment transfers

  -   -   125,580     (522,548 )   223,307   451,915     ($278,254 )   -   -    -  

Goodwill impairment

  -   -   (299,241 )   -     -   (451,915 )   -     -   -    (751,156 )

Inlign Wealth Management Investments, LLC purchase price adjustments1

  -   -   -     -     -   -     -     3,121   -    3,121  

TBK Investments, Inc. purchase price adjustments1

  -   -   -     -     -   -     -     493   -    493  

GB&T purchase price adjustment

  -   -   535     -     -   -     -     -   -    535  

Seix contingent consideration

  -   -   -     -     -   -     -     12,722   -    12,722  

Cymric Family Office Services purchase price adjustment

  -   -   -     -     -   -     -     213   -    213  
                                                  

Balance, March 31, 2009

  $-   $-   $5,738,864     $-     $223,307   $-     $-     $347,260   $-    $6,309,431  
                                                  

1 SFAS No. 141 requires net assets acquired in a business combination to be recorded at their estimated fair value. Adjustments to the estimated fair value of acquired assets and liabilities generally occur within one year of the acquisition. However, tax related adjustments are permitted to extend beyond one year due to the degree of estimation and complexity. The purchase adjustments in the above table represent adjustments to the estimated fair value of the acquired net assets within the guidelines under U.S. GAAP.

 

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Changes in the carrying amounts of other intangible assets for the three months March 31 are as follows:

 

(Dollars in thousands)        Core Deposit    
Intangibles
   Mortgage
Servicing Rights-
    Amortized Cost    
   Mortgage
Servicing Rights-
Fair Value
       Other            Total    

Balance, January 1, 2008

   $172,655      $1,049,425      $-            $140,915            $1,362,995  

Amortization

   (14,952)     (56,442)     -      (5,763)     (77,157) 

MSRs originated

   -      152,303      -      -      152,303  

Sale of interest in Lighthouse Investment Partners

   -      -      -      (5,992)     (5,992) 

MSRs impairment reserve

   -      (1,881)     -      -      (1,881) 
                        

Balance, March 31, 2008

   $157,703      $1,143,405      $-            $129,160            $1,430,268  
                        

Balance, January 1, 2009

   $145,311      $810,474      $-      $79,642            $1,035,427  

Designated at fair value (transfers from amortized cost)

   -      (187,804)     187,804      -      -  

Amortization

   (11,881)     (67,467)     -      (4,108)     (83,456) 

MSRs originated

   -      -      146,290      -      146,290  

MSRs impairment recovery

   -      31,298      -      -      31,298  

Changes in fair value

              

Due to changes in inputs or assumptions 1

   -      -      (9,054)     -      (9,054) 

Other changes in fair value 2

   -      -      (16,744)     -      (16,744) 

Other

   -      -      -          (428)     (428) 
                        

Balance, March 31, 2009

   $133,430      $586,501      308,296            $75,106           $1,103,333  
                        

 

1

Primarily reflects changes in discount rates and prepayment speed assumptions, due to changes in interest rates.

2

Represents changes due to the collection of expected cash flows, net of accretion due to passage of time.

As reflected in the table above, the Company elected to create a second class of mortgage servicing rights (“MSRs”) effective January 1, 2009. This new class of MSRs is reported at fair value and is being actively hedged as discussed in Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements. Prior to this election, the Company did not actively hedge MSRs but managed the economic risk through the Company’s overall asset/liability management process with consideration to the natural counter-cyclicality of servicing and mortgage originations. The new MSRs class includes MSRs recognized on loans sold after December 31, 2008, as well as MSRs related to loans originated and sold in 2008. The portion of existing MSRs being transferred to the new MSRs class reflects management’s desire to actively hedge this portion of the existing MSRs given the higher prepayment risk associated with loans sold in 2008 and subsequent thereto. MSRs associated with loans originated or sold prior to 2008 continue to be accounted for using the amortized cost method and managed through the Company’s overall asset/liability management process. The transfer of MSRs from the amortized cost method to fair value did not have a material effect on the Consolidated Financial Statements since the MSRs were effectively reported at fair value as of December 31, 2008 as a result of impairment losses recognized at the end of 2008.

Note 6 – Certain Transfers of Financial Assets, Mortgage Servicing Rights and Variable Interest Entities

Certain Transfers of Financial Assets

The Company has transferred residential and commercial mortgage loans, student loans, commercial and corporate loans and collateralized debt obligation (“CDO”) securities in a sale or securitization in which the Company has, or had, continuing involvement. All such transfers have been accounted for as sales by the Company. The Company’s continuing involvement in such transfers has been limited to owning certain beneficial interests, such as securitized debt instruments, and certain servicing or collateral manager responsibilities. Except as specifically noted herein, the Company is not required to provide additional financial support to any of these entities, nor has the Company provided any support it was not obligated to provide. Generally, the Company’s forms of continuing involvement under SFAS No. 140 also constituted variable interests (“VIs”) under FIN 46(R). Interests that continue to be held by the Company in transferred financial assets, excluding servicing and collateral management rights, are generally recorded as securities available for sale or trading assets at their allocated carrying amounts based on their relative fair values at the time of transfer and are subsequently remeasured at fair value. For such interests, when quoted market prices are not available, fair value is generally estimated based on the present value of expected cash flows, calculated using management’s best estimates of key assumptions, including credit losses, loan repayment speeds, and discount rates commensurate with the risks involved, based on how management believes market participants would determine such assumptions. See Note 13, “Fair Value Election and Measurement,” to the Consolidated Financial

 

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Statements for further discussion of the Company’s fair value methodologies. Servicing rights may give rise to servicing assets, which are either initially recognized at fair value, subsequently amortized, and tested for impairment or elected to be carried at fair value. Gains or losses upon sale, in addition to servicing fees and collateral management fees, are recorded in noninterest income. Changes in the fair value of interests that continue to be held by the Company that are accounted for as trading assets or securities available for sale are recorded in trading account profits and commissions or as a component of accumulated other comprehensive income (“AOCI”), respectively. In the event any decreases in the fair value of such interests that are recorded as securities available for sale are deemed to be other-than-temporary, such losses are recorded in securities gains/losses.

Residential Mortgage Loans

SunTrust typically transfers first lien residential mortgage loans in securitization transactions involving QSPEs sponsored by Ginnie Mae, Fannie Mae and Freddie Mac. These loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights, which generate servicing assets for the Company. The servicing assets are recorded initially at fair value. Beginning January 1, 2009, the Company began to carry certain mortgage servicing rights at fair value along with servicing rights that were originated in 2008 which were transferred to fair value. See “Mortgage Servicing Rights” herein for further discussion regarding the accounting for servicing rights. In a limited number of securitizations, the Company has transferred loans to QSPEs sponsored by the Company. In these transactions, the Company has received securities representing retained interests in the transferred loans in addition to cash and servicing rights in exchange for the transferred loans. The retained securities are carried at fair value as either trading assets or securities available for sale. The Company has accounted for all transfers of residential mortgage loans to QSPEs as sales and, because the transferees are QSPEs, the Company does not consolidate any of these entities. No events have occurred during the quarter ended March 31, 2009 that changed the status of the QSPEs or the nature of the transactions, which would have called into question either the Company’s sale accounting or the QSPE status of the transferees.

As seller, the Company has made certain representations and warranties with respect to the originally transferred loans, which are discussed in Note 11, “Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements. Repurchases of loans from QSPEs sponsored by the Company totaled approximately $17 million in 2008, including approximately $13 million of second lien loans that were substituted with new loans. No additional repurchases occurred during the three month period ended March 31, 2009.

Commercial Mortgage Loans

Certain transfers of commercial mortgage loans were executed with third party special purpose entities, which the Company deemed to be QSPEs and did not consolidate. During 2008, the Company sold all of the related servicing rights, which were not financial assets subject to SFAS No. 140, in exchange for cash proceeds of approximately $6.6 million. As seller, the Company has made certain representations and warranties with respect to the originally transferred loans, but the Company has not incurred any losses with respect to such representations and warranties.

Commercial and Corporate Loans

In 2007, the Company completed a structured sale of corporate loans to multi-seller commercial paper conduits, which are VIEs administered by unrelated third parties, from which it retained a 3% residual interest in the pool of loans transferred, which does not constitute a variable interest in the third party conduits as it relates to the unparticipated portion of the loans. During the three month period ended March 31, 2009, the Company wrote this residual interest and related accrued interest to zero, resulting in a loss of approximately $16.6 million inclusive of accrued interest. This write off was the result of the deterioration in the performance of the loan pool to such an extent that the Company will no longer receive cash flows on the interest until the senior participation interest has been repaid in full. The fair value of the residual at March 31, 2009 and December 31, 2008 was $0.0 million and $16.2 million, respectively. The Company provides commitments in the form of liquidity facilities to these conduits; the sum of these commitments, which represents the Company’s maximum exposure to loss under the facilities, totaled $473.7 million and $500.7 million at March 31, 2009 and December 31, 2008, respectively. No events have occurred during the quarter ended March 31, 2009 that would have called into question either the Company’s sale accounting or the Company’s conclusions that it is not the primary beneficiary of these VIEs.

The Company has also transferred commercial leveraged loans and bonds to securitization vehicles that are considered VIEs. In addition to retaining certain securities issued by the VIEs, the Company also acts as manager or servicer for these VIEs as well as other VIEs that are funds of commercial leveraged loans and high yield bonds. At March 31, 2009 and December 31, 2008, the Company’s direct exposure to loss related to these VIEs was approximately $11.2 million and $16.7 million, respectively, which represent the Company’s interests in preference shares of these entities. During the quarter ended March 31, 2009, the

 

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Company recognized losses of approximately $6.8 million related to the write off of the preference shares in all of the commercial loans and bonds securitization vehicles due to deterioration in the performance of the collateral in those vehicles. The Company does not expect to receive cash from its ownership of those preference shares in the foreseeable future. The Company continues to hold an interest in the preference shares of a fund of commercial leveraged loans and bonds, which represents the Company’s direct exposure of $11.2 million at March 31, 2009. At March 31, 2009 and December 31, 2008, total assets of these entities not included on the Company’s Consolidated Balance Sheets were approximately $2.7 billion. No reconsideration events, as defined in FIN 46(R), occurred during the three month period ended March 31, 2009 that would change the Company’s conclusion that it is not the primary beneficiary of these entities.

Student Loans

In 2006, the Company completed one securitization of student loans through a transfer of loans to a QSPE and retained the corresponding residual interest in the QSPE trust. The fair value of the residual interest at March 31, 2009 and December 31, 2008 was $16.4 million and $13.4 million, respectively. No events have occurred during the quarter ended March 31, 2009 that changed the status of the QSPEs or the nature of the transactions, which would have called into question either the Company’s sale accounting or the QSPE status of the transferees.

CDO Securities

The Company has historically transferred bank trust preferred and subordinated debt securities in securitization transactions. The majority of these transfers occurred between 2002 and 2005 with one transaction completed in 2007. During 2008, the Company recognized impairment losses, net of distributions received, of $15.9 million related to the ownership of its equity interests in these VIEs and, at December 31, 2008, these equity interests had all been written down to a fair value of zero due to increased losses in the underlying collateral. For the quarter ended March 31, 2009, the Company received $0.4 million in interest payments from these entities from senior interests acquired during 2007 and 2008, in conjunction with its acquisition of assets from Three Pillars Funding, LLC (“Three Pillars”) and the auction rate securities (“ARS”) issue discussed in Note 14, “Contingencies,” to the Consolidated Financial Statements. No events have occurred during the quarter ended March 31, 2009 that would have called into question either the Company’s sale accounting or the Company’s conclusions that it is not the primary beneficiary of these VIEs. The total assets of the trust preferred CDO entities in which the Company has continuing involvement was $2.0 billion at March 31, 2009 and December 31, 2008. The Company is not obligated to provide any support to these entities and its maximum exposure to loss at March 31, 2009 and December 31, 2008 is limited to (1) the current positions held in trading securities with a fair value of $45.9 million and $45.0 million, respectively, and (2) the remaining securities expected to be purchased in conjunction with the ARS issue, which have a total fair value of $4.3 million and $9.7 million, respectively.

In 2006, the Company received $472.6 million in proceeds from the transfer of debt securities into a securitization of CDO securities of asset-backed securities (“ABS”) and residential mortgage-backed securities (“MBS”). The securitization entity was liquidated in 2008.

The following tables present certain information related to the Company’s asset transfers in which it has continuing involvement for each of the periods ended March 31, 2009 and March 31, 2008. The Company did not execute any asset transfers in the periods presented.

 

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     Quarter Ended March 31, 2009
(Dollars in thousands)        Residential    
Mortgage
Loans
       Commercial    
Mortgage
Loans
       Commercial    
and
Corporate
Loans
       Student    
Loans
   CDO
    Securities    
       Consolidated    

Cash flows on interests held

   $20,181      $-    $394      $338      $439      $21,352  

Servicing or management fees

   1,336      -    2,983      204      -      4,523  
     Quarter Ended March 31, 2008
(Dollars in thousands)    Residential
Mortgage
Loans
   Commercial
Mortgage
Loans
   Commercial
and
Corporate
Loans
   Student
Loans
   CDO
Securities
   Consolidated

Cash flows on interests held

   $21,447      $-      $4,101      $456      $649      $26,653  

Servicing or management fees

   1,578      66      3,387      214      -      5,245  

As transferor, the Company typically provides standard representations and warranties in relation to assets transferred. However, other than the loan substitution discussed previously herein, purchases of assets previously transferred in securitization transactions were insignificant across all categories for all periods presented.

The Company’s retained interests include senior and subordinated securities in residential mortgage securitization transactions and subordinated interests in securitizations of commercial and corporate loans, student loans and CDO securities. At March 31, 2009, the total fair value of such interests was approximately $259.4 million, as compared to $292.3 million at December 31, 2008. The weighted average remaining lives of the Company’s retained interests ranged from approximately 3 years to 19 years for interests in residential mortgage loans, commercial and corporate loans and student loans as of March 31, 2009 and December 31, 2008, with the weighted average remaining life of interests in CDO securities approximating 25 years. To estimate the fair values of these securities, consideration was given to dealer indications of market value, where applicable, as well as the results of discounted cash flow models using key assumptions and inputs for prepayment rates, credit losses, and discount rates. The Company has considered the impacts on the fair values of two unfavorable variations from the estimated amounts, related to the fair values of the Company’s retained and residual interests, excluding MSRs, which are separately addressed herein. Declines in fair values for the total retained interests due to 10% and 20% adverse changes in the key assumptions and inputs totaled approximately $18.3 million and $32.8 million, respectively, as of March 31, 2009, as compared to approximately $20.1 million and $40.0 million, respectively, as of December 31, 2008. For certain subordinated retained interests in residential mortgage securitizations, the Company uses dealer indicated prices, as the Company believes these price indications more accurately reflect the severe disruption in the market for these securities as opposed to modeling efforts the Company could otherwise undertake. As such, the Company has not evaluated any adverse changes in key assumptions of these values. As of March 31, 2009 and December 31, 2008, the fair values of these subordinated interests were $7.3 million and $4.4 million respectively, based on weighted average prices of 20.8% and 12.3% of par, respectively. Expected static pool losses were approximately 1% to 9% for interests related to securitizations of residential mortgage loans as of March 31, 2009 as compared to 5% or less for residential mortgage loans and commercial and corporate loans, as of December 31, 2008, with the reduction due to the write off of the Company’s retained interests in securitizations of commercial and corporate loans. For interests related to securitizations of CDO securities, expected static pool losses ranged from approximately 23% to 32% as of March 31, 2009 and December 31, 2008.

Portfolio balances and delinquency balances based on 90 days or more past due (including accruing and nonaccrual loans) as of March 31, 2009 and December 31, 2008, and net charge-offs related to managed portfolio loans (both those that are owned by the Company and those that have been transferred) for the three month periods ended March 31, 2009 and March 31, 2008 are as follows:

 

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     Principal Balance    Past Due    Net Charge-offs
     March 31,    December 31,    March 31,    December 31,    For the Three Months
Ended March 31,
(Dollars in millions)    2009    2008    2009    2008    2009    2008

Type of loan:

                 

Commercial

   $38,616.3      $41,039.9      $507.6      $340.9        $131.8      $28.2  

Residential mortgage and home equity

   48,635.9      48,520.2      3,234.5      2,727.6      338.9      204.2  

Commercial real estate and construction

   24,140.6      24,821.1      1,766.1      1,492.6      83.2      23.1  

Consumer

   11,524.7      11,646.9      474.4      411.1      39.6      37.3  

Credit card

   975.5      970.3      -      -      16.6      4.4  
                             

Total loan portfolio

     123,893.0      126,998.4        5,982.6      4,972.2        610.1        297.2  

Managed securitized loans

                 

Commercial

   3,682.9      3,766.8      25.4      30.2      7.0      -  

Residential mortgage

   1,750.7      1,836.2      87.3      132.2      9.0      4.2  

Other

   539.6      565.2      54.5      61.6      -      0.3  
                             

Total managed loans

   $129,866.2      $133,166.6        $6,149.8      $5,196.2      $626.1      $301.7  
                             

Residential mortgage loans securitized through Ginnie Mae, Fannie Mae, and Freddie Mac have been excluded from the tables above since the Company does not retain any beneficial interests or other continuing involvement in the loans other than servicing responsibilities and repurchase contingencies under standard representations and warrantees made with respect to the transferred mortgage loans. The total amount of loans serviced by the Company as a result of such securitization transactions totaled $109.4 billion and $106.6 billion at March 31, 2009 and December 31, 2008, respectively. Related servicing fees received by the Company during the three month periods ended March 31, 2009 and March 31, 2008 were $76.2 million and $70.3 million, respectively.

Mortgage Servicing Rights

In addition to other interests that continue to be held by the Company in the form of securities, the Company also retains MSRs from certain of its sales or securitizations of residential mortgage loans. MSRs on residential mortgage loans are the only servicing assets capitalized by the Company. The Company maintains two classes of MSRs: MSRs related to loans originated and sold after January 1, 2008, which are reported at fair value; and MSRs related to loans sold before January 1, 2008, which are reported at amortized cost, net of any allowance for impairment losses.

Any impacts of this activity are reflected in the Company’s Consolidated Statements of Income in mortgage servicing-related income. See Note 5, “Goodwill and Other Intangible Assets”, to the Consolidated Financial Statements for the rollforward of MSRs.

Income earned by the Company on its MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs. Such income earned for the three month periods ended March 31, 2009 and March 31, 2008 was $81.8 million and $85.1 million, respectively. These amounts are reported in mortgage servicing-related income in the Consolidated Statements of Income.

As of March 31, 2009 and December 31, 2008, the total unpaid principal balance of mortgage loans serviced was $166.4 billion and $162.0 billion, respectively. Included in these amounts were $131.9 billion and $130.5 billion as of March 31, 2009 and December 31, 2008, respectively, of loans serviced for third parties. As of March 31, 2009 and December 31, 2008, the Company had established valuation allowances of $174.6 million and $370.0 million, respectively. No permanent impairment losses were written-off against the allowance during the year ended December 31, 2008 or the first quarter of 2009.

Prepayment risk subjects the MSRs carried at the lower of cost or market to impairment risk. Impairment of MSRs is recognized when the fair value is less than the amortized cost basis of the MSRs. For purposes of measuring impairment, MSRs are stratified based on interest rate and type of related loan. When fair value is less than amortized cost for an individual stratum and the impairment is believed to be temporary, the impairment is recorded to a valuation allowance; the impairment is recorded as a write-down of the amortized cost basis of the MSRs when the impairment is deemed other-than-temporary.

A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the Company’s MSRs and the sensitivity of the March 31, 2009 and December 31, 2008 fair values to immediate 10% and 20% adverse changes in those assumptions follows.

 

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(Dollars in millions)    2009
    Fair Value    
   2009
    Amortized Cost    
   2008
    Amortized Cost    

Fair value of retained MSRs

   $308.3      $596.6      $815.6  

Prepayment rate assumption (annual)

   27.8%      31.8%      32.8%  

Decline in fair value of 10% adverse change

   $21.9      $46.3      $61.2  

Decline in fair value of 20% adverse change

   41.0      86.4      113.8  

Discount rate (annual)

   9.1%      9.8%      9.3%  

Decline in fair value of 10% adverse change

   $8.4      $12.4      $17.9  

Decline in fair value of 20% adverse change

   16.3      24.3      35.0  

Weighted average life (in years)

   3.60      2.61      2.50  

Weighted average coupon

   5.80      6.15      6.15  

The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

Variable Interest Entities (“VIEs”)

In addition to the Company’s involvement with VIEs that has arisen due to certain transfers of financial assets, which is discussed herein under “Certain Transfers of Financial Assets”, the Company also has involvement with VIEs from other business activities.

Three Pillars Funding, LLC

SunTrust assists in providing liquidity to select corporate clients by directing them to a multi-seller commercial paper conduit, Three Pillars. Three Pillars provides financing for direct purchases of financial assets originated and serviced by SunTrust’s corporate clients. Three Pillars finances this activity by issuing A-1/P-1 rated commercial paper (“CP”); however, subsequent to March 31, 2009, Three Pillars CP was downgraded to A-2/P-1 due to the downgrade to A-/A2 of SunTrust Bank (the “Bank”) which provides liquidity and credit enhancement to Three Pillars. This downgrade was not a reflection on the asset quality of Three Pillars. Three Pillars had no other form of funding outstanding as of March 31, 2009 or December 31, 2008.

The Company’s involvement with Three Pillars includes the following activities: services related to the administration of Three Pillars’ activities and client referrals to Three Pillars; the issuing of letters of credit, which provide partial credit protection to the commercial paper holders; and providing the majority of the liquidity arrangements that would provide funding to Three Pillars in the event it can no longer issue commercial paper or in certain other circumstances. The Company’s activities with Three Pillars generated total fee revenue for the Company, net of direct salary and administrative costs incurred by the Company, of approximately $17.7 million and $6.3 million for the three month periods ended March 31, 2009 and 2008, respectively.

Three Pillars has issued a subordinated note to a third party, which matures in March 2015; however, the note holder may declare the note due and payable upon an event of default, which includes any loss drawn on the note funding account that remains unreimbursed for 90 days. The subordinated note holder absorbs the first dollar of loss in the event of nonpayment of any of Three Pillars’ assets. Only the remaining balance of the first loss note, after any incurred losses, will be due. If the first loss note holder declared its loss note due under such circumstances and a new first loss note or other first loss protection was not obtained, the Company would likely consolidate Three Pillars on a prospective basis. The outstanding and committed amounts of the subordinated note were $20.0 million at March 31, 2009 and December 31, 2008.

The Company has determined that Three Pillars is a VIE, as Three Pillars has not issued sufficient equity at risk, as defined by FIN 46(R). The Company and the holder of the subordinated note are the two significant VIE holders in Three Pillars. The Company and this note holder are not related parties or de facto agents of one another. As such, the Company has developed a mathematical model that calculates the expected losses and expected residual returns of Three Pillars’ assets and operations, based on a Monte Carlo simulation, and allocates each to the Company and the

 

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holder of the subordinated note. The results of this model, which the Company evaluates monthly, have shown that the holder of the subordinated note absorbs the majority of the variability of Three Pillars’ expected losses. The Company believes the subordinated note is sized in an amount sufficient to absorb the expected loss of Three Pillars based on current commitment levels, as well as on the forecasted growth in Three Pillars’ assets and, therefore, has concluded it is not Three Pillars’ primary beneficiary and is not required to consolidate Three Pillars. Should future losses reduce the subordinated note funding account below its required level or if the note is reduced to a size deemed insufficient to support the growth of the assets in Three Pillars, the Company would likely be required to consolidate Three Pillars, if an amendment of the current subordinate note or a new subordinate note could not be obtained. The Company currently believes that any events related to the credit quality of Three Pillars’ assets that may result in consolidation are unlikely to occur.

As of March 31, 2009 and December 31, 2008, Three Pillars had assets not included on the Company’s Consolidated Balance Sheets of approximately $3.3 billion and $3.5 billion, respectively, consisting primarily of secured loans. Funding commitments and outstanding receivables extended by Three Pillars to its customers totaled $5.3 billion and $3.3 billion, respectively, as of March 31, 2009, almost all of which renew annually as compared to $5.9 billion and $3.5 billion, respectively, as of December 31, 2008. The majority of the commitments are backed by trade receivables and commercial loans that have been originated by companies operating across a number of industries which collateralize 47% and 15%, respectively, of the outstanding commitments, as of March 31, 2009, as compared to 47% and 20%, respectively, as of December 31, 2008. Assets supporting those commitments have a weighted average life of 1.48 years and 1.52 years at March 31, 2009 and December 31, 2008, respectively. Each transaction added to Three Pillars is typically structured to a minimum implied A/A2 rating according to established credit and underwriting policies as approved by Credit Risk Management and monitored on a regular basis to ensure compliance with each transaction’s terms and conditions. Typically, transactions contain dynamic credit enhancement structures that provide increased credit protection in the event asset performance deteriorates. If asset performance deteriorates beyond predetermined covenant levels, the transaction could become ineligible for continued funding by Three Pillars. This could result in the transaction being amended with the approval of Credit Risk Management, or Three Pillars could terminate the transaction and enforce any rights or remedies available including amortization of the transaction or liquidation of the collateral. In addition, Three Pillars has the option to fund under the liquidity facility provided by the Company in connection with the transaction and may be required to fund under the liquidity facility if the transaction remains in breach. In addition, each commitment renewal requires Credit Risk Management approval. The Company is not aware of unfavorable trends within Three Pillars for which the Company expects to suffer material losses. During the quarters ended March 31, 2009 and 2008, there were no write-downs of Three Pillars’ assets.

At March 31, 2009, Three Pillars’ outstanding CP used to fund the above assets totaled $3.3 billion, with remaining weighted average lives of 15.3 days and maturities through June 16, 2009. Three Pillars was generally able to fund itself by issuing CP on behalf of commercial clients, despite the lack of market liquidity. However, during the month of September 2008, the illiquid markets put a significant strain on the CP market and, as a result of this temporary disruption, the Company purchased approximately $275.4 million par amount of Three Pillars overnight CP, none of which was outstanding at December 31, 2008. Separate from the temporary disruption in the CP markets in September, the Company held outstanding Three Pillars’ CP at December 31, 2008 with a par amount of $400 million, all of which matured on January 9, 2009. The Company did not hold any Three Pillars’ CP at March 31, 2009. Subsequent to March 31, 2009, the downgrade of the credit rating of Three Pillars by one national rating agency negatively impacted its ability to issue CP. As a result, the Company has purchased certain amounts of overnight CP at estimated market rates, on a discretionary and non-contractual basis, as the Company continues to monitor the impacts of the downgrade of Three Pillars’ CP. The Company will continue to evaluate its interest in purchasing Three Pillars’ CP as market events develop. None of the Company’s purchases of CP during 2009 and 2008 altered the Company’s conclusion that it is not the primary beneficiary of Three Pillars.

The Company has off-balance sheet commitments in the form of liquidity facilities and other credit enhancements that it has provided to Three Pillars. These commitments are accounted for as financial guarantees by the Company in accordance with the provisions of FIN 45. The liquidity commitments are revolving facilities that are sized based on the current commitments provided by Three Pillars to its customers. The liquidity facilities are generally used if new commercial paper cannot be issued by Three Pillars to repay maturing commercial paper. However, the liquidity facilities are available in all circumstances, except certain bankruptcy-related events with respect to Three Pillars. Draws on the facilities are subject to the purchase price (or borrowing base) formula that, in many cases, excludes defaulted assets to the extent that they exceed available over-collateralization in the form of non-defaulted assets, and may also provide the liquidity banks with loss protection equal to a portion of the loss protection provided for in the related securitization agreement. Additionally, there are transaction specific covenants and triggers that are tied either to the performance of the assets of the relevant seller/servicer that may result in a transaction termination event, which, if continuing, would require funding through the related liquidity facility. Finally, in a termination event of Three Pillars, such as if its tangible net worth falls below $5,000 for a period in excess of 15 days, Three Pillars would be unable to issue CP which would likely result in funding through the liquidity facilities.

 

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Draws under the credit enhancement are also available in all circumstances, but are generally used to the extent required to make payment on any maturing commercial paper if there are insufficient funds from collections of receivables or the use of liquidity facilities. The required amount of credit enhancement at Three Pillars will vary from time to time as new receivable pools are purchased or removed from its asset portfolio, but is generally equal to 10% of the aggregate commitments of Three Pillars.

The Company manages the credit risk associated with these commitments by subjecting them and the underlying collateral assets of Three Pillars to the Company’s normal credit approval and monitoring processes. Any losses on the commitments provided to Three Pillars by the Company resulting from a loss due to nonpayment on the underlying assets would be reimbursed to the Company from the subordinated note reserve account, which is the amount outstanding on the subordinated note agreement. The total notional amounts of the liquidity facilities and other credit enhancements represent the Company’s maximum exposure to potential loss, which was $5.4 billion and $536.2 million, respectively, as of March 31, 2009, compared to $6.1 billion and $597.5 million, respectively, as of December 31, 2008. The Company did not have any liability recognized on its Consolidated Balance Sheets related to these liquidity facilities and other credit enhancements as of March 31, 2009 or December 31, 2008, as no amounts had been drawn, nor were any draws probable to occur, such that a loss should have been accrued. In addition, no losses were recognized by the Company in connection with these off-balance sheet commitments during the three month periods ended March 31, 2009 or 2008. There are no other contractual arrangements that the Company plans to enter into with Three Pillars to provide it additional support.

Prior to January 1, 2008, the Company had provided a separate liquidity facility to Three Pillars that supported Three Pillars’ qualified ABS. During the year ended December 31, 2007, Three Pillars decided to exit those types of investments due to continued deterioration in the performance of the underlying collateral and market illiquidity, which resulted in a material decrease in the market value of those securities. In order to exit this business, Three Pillars drew on this separate liquidity facility with the Company, under which the Company purchased the qualified ABS at amortized cost plus the related unpaid CP interest used to fund that investment, which totaled $725.0 million. Subsequent to this funding, Three Pillars and the Company canceled this separate liquidity agreement, as Three Pillars had exited this business. Of the investments included in the purchase, only one security in the amount of $62 million had experienced a decline in credit to such an extent that management believed a future principal loss on the ABS was likely to occur. As a result of the purchase of the qualified ABS, the Company recorded a trading loss of $144.8 million during the fourth quarter of 2007. Since the purchase, the Company has sold all but one of the ABS positions, which has a fair value of $9.2 million at March 31, 2009. For the year ended December 31, 2008, the Company received $406.6 million in proceeds from the sales of these ABS, $14.1 million of paydowns, and recognized $144.8 million in net trading losses; the Company did not receive any such proceeds for the three month period ended March 31, 2009.

Total Return Swaps (“TRS”)

The Company has had involvement with various VIEs that purchase portfolios of loans at the direction of third parties. These third parties are not related parties to the Company, nor are they and the Company de facto agents of each other. In order for the VIEs to purchase the loans, the Company provides senior financing to these VIEs. At March 31, 2009 and December 31, 2008, the Company had $339.3 million and $603.4 million, respectively, in such financing outstanding, which is classified within trading assets on the Consolidated Balance Sheets. In addition, the Company also enters into TRS transactions with the VIEs that the Company mirrors with a TRS with the third party who controls the loans owned by the VIE. The TRS transactions pass through all interest and other cash flows on the loans to the third party, along with exposing the third parties to any depreciation on the loans and providing them with the rights to all appreciation on the loans. The terms of the TRS transactions require the third parties to post initial margin, in addition to ongoing margin as the fair values of the underlying loans decrease. The Company has concluded that it is not the primary beneficiary of these VIEs. The VIEs are designed for the benefit of the third parties, and the third parties have implicit variable interests in the VIEs via their TRS transactions with the Company, whereby these third parties absorb the majority of the expected losses and are entitled to the majority of the expected residual returns of the VIEs. At March 31, 2009 and December 31, 2008, these VIEs had entered into TRS with the Company that had outstanding notional of $339.3 million and $602.1 million, respectively. The Company has not provided any support that it was not contractually obligated to for the three months ended March 31, 2009 or the year ended December 31, 2008. The Company decided to exit this business in late 2008 and is in the process of terminating the transactions. For additional information on the Company’s TRS with these VIEs, see Note 10, “Derivative Financial Instruments” to the Consolidated Financial Statements.

 

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Community Development Investments

As part of its community reinvestment initiatives, the Company invests almost exclusively throughout its footprint in multi-family affordable housing developments and other community development entities as a limited and/or general partner and/or a debt provider. The Company receives tax credits for its partnership investments. The Company has determined that these partnerships are VIEs when SunTrust does not own 100% of the entity because the holders of the equity investment at risk do not have the direct or indirect ability to make decisions that have a significant impact on the business. Accordingly, the Company’s general partner, limited partner and/or debt interests are variable interests that the Company evaluates for purposes of determining whether the Company is the primary beneficiary. During 2009 and 2008, SunTrust did not provide any financial or other support to its consolidated or unconsolidated investments that it was not previously contractually required to provide.

For some partnerships, SunTrust operates strictly as a general partner or the indemnifying party and as such is exposed to a majority of the partnerships’ expected losses. Accordingly, SunTrust consolidates these partnerships on its Consolidated Balance Sheet. As the general partner or indemnifying party, SunTrust typically guarantees the tax credits due to the limited partner and is responsible for funding construction and operating deficits. As of March 31, 2009 and December 31, 2008, total assets, which consists primarily of fixed assets and cash attributable to the consolidated partnerships, were $19.3 million and $20.5 million, respectively, and total liabilities, excluding intercompany liabilities were $3.2 million and $3.3 million, respectively. Security deposits from the tenants are recorded as liabilities on SunTrust’s Consolidated Balance Sheet. The Company maintains separate cash accounts to fund these liabilities and these assets are considered restricted. The tenant liabilities and corresponding restricted cash assets were $0.1 million as of March 31, 2009 and December 31, 2008. While the obligations of the general partner or indemnifying entity are generally non-recourse to SunTrust, the Company, as the general partner or the indemnifying entity, may from time to time step in when needed to fund deficits. During 2009 and 2008, SunTrust did not provide any significant amount of funding as the general partner or the indemnifying entity to fund any deficits they may have had.

For other partnerships, the Company acts only in a limited partnership capacity. The Company has determined that it is not the primary beneficiary of these partnerships because it will not absorb a majority of the expected losses of the partnership. Typically, the general partner or an affiliate of the general partner provide guarantees to the limited partner which protect the Company from losses attributable to operating deficits, construction deficits, and tax credit allocation deficits. The Company accounts for its limited partner interests in accordance with the provisions of EITF No. 94-1, “Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects”. Partnership assets of approximately $1.1 billion and $1.0 billion in these partnerships were not included in the Consolidated Balance Sheets at March 31, 2009 and December 31 2008, respectively. These limited partner interests had carrying values of $198.3 million and $188.9 million at March 31, 2009 and December 31, 2008, respectively, and are recorded in other assets on the Company’s Consolidated Balance Sheets. The Company’s maximum exposure to loss for these limited partner investments totaled $478.9 million and $473.2 million at March 31, 2009 and December 31, 2008, respectively. The Company’s maximum exposure to loss would be borne by the loss of the limited partnership equity investments along with $209.7 million and $202.7 million of loans issued by the Company to the limited partnerships at March 31, 2009 and December 31, 2008, respectively. The difference between the maximum exposure to loss and the investment and loan balances is primarily attributable to the unfunded equity commitments. Unfunded equity commitments are amounts that SunTrust has committed to the partnerships upon the partnerships meeting certain conditions. When these conditions are met, the Company will invest these additional amounts in the partnerships.

When SunTrust owns both the limited partner and general partner or indemnifying party, SunTrust consolidates the partnerships and does not consider these partnerships VIEs because as owner of the partnerships the Company has the ability to directly and indirectly make decisions that have a significant impact on the business. As of March 31, 2009 and December 31, 2008, total assets, which consist primarily of fixed assets and cash, attributable to the consolidated, non-VIE partnerships were $485.2 million and $493.5 million, respectively, and total liabilities, excluding intercompany liabilities, primarily representing third-party borrowings, were $330.2 million and $327.6 million, respectively.

RidgeWorth Family of Mutual Funds

RidgeWorth Capital Management, Inc., (“RidgeWorth”), a registered investment advisor and wholly-owned subsidiary of the Company, serves as the investment advisor for various private placement and publicly registered investment funds (collectively the “Funds”). The Company evaluates these Funds to determine if the Funds are voting interest entities or VIEs, as well as monitors the nature of its interests in each Fund to determine if the Company is required to consolidate any of the Funds.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

The Company has concluded that some of the Funds are VIEs because the equity investors lack decision making rights. However, the Company has concluded that it is not the primary beneficiary of these funds as the Company does not absorb a majority of the expected losses or expected returns of the funds. As the Company does not invest in these funds, its exposure to loss is limited to the investment advisor and other administrative fees it earns. Payment on these fees is received from the individual investor accounts. The total unconsolidated assets of these funds as of March 31, 2009 and December 31, 2008 were $3.4 billion and $3.6 billion, respectively.

While the Company does not have any contractual obligation to provide monetary support to any of the Funds, the Company did elect to provide support for specific securities on one occasion in 2008 and two occasions in 2007 to three of the funds. In 2008 and 2007, the Company purchased approximately $2.4 billion of securities from these three funds at amortized cost plus accrued interest. The Company took these actions in response to unprecedented market events to protect investors in these funds from possible losses associated with these securities. Two of the funds were previously considered voting interest entities and in connection with these purchases, the Company re-evaluated its involvement with these funds. As a result of the unprecedented circumstances that caused the Company to intervene, the lack of any contractual obligation to provide any current or future support to the funds, and the size of the financial support ultimately provided, the Company concluded that these two funds were still voting interest entities. The Company concluded that the third fund was a VIE and that, as a result of the purchase of securities, it was the primary beneficiary of this fund as it was likely to absorb a majority of the expected losses of the fund. Accordingly, this fund was consolidated in September 2007 and was subsequently closed in November 2007, which resulted in the termination of the VIE. At March 31, 2009 and December 31, 2008, the Company still owned securities purchased from these three funds of $226.9 million and $246.0 million, respectively. Additionally, see the Annual Report on Form 10-K for the year ended December 31, 2008 for more information regarding the actions SunTrust took in 2008 and 2007 relating to these funds.

Note 7 - Earnings Per Share

 

     Three Months Ended
     

March 31

(In thousands, except per share data)   

        2009        

      

        2008        

Net income/(loss)

   ($815,167)       $290,555  

Series A preferred dividends

   5,000        6,977  

U.S. Treasury preferred dividends

   66,279        -  

Dividends and undistributed earnings allocated to unvested shares

   (11,065)       2,023  
           

Net income/(loss) available to common shareholders

   ($875,381)       $281,555  
           

Average basic common shares

   351,352        346,581  

Effect of dilutive securities:

       

Stock options

   -        557  

Performance and restricted stock

   -        934  
           

Average diluted common shares

   351,352        348,072  
           

Earnings/(loss) per average common share - diluted

   ($2.49)       $0.81  
           

Earnings/(loss) per average common share - basic

   ($2.49)       $0.81  
           

Note 8 - Income Taxes

The provision for income taxes was a benefit of $150.8 million and expense of $91.6 million for the three months ended March 31, 2009 and 2008, respectively, representing effective tax rates of (15.6)% and 24.0% during those periods. The Company calculated the benefit for income taxes for the three months ended March 31, 2009 discretely based on actual year-to-date results. The Company applied an estimated annual effective tax rate to the year-to-date pre-tax earnings to derive the provision for income taxes for the three months ended March 31, 2008.

As of March 31, 2009, the Company’s gross cumulative unrecognized tax benefits (“UTBs”) amounted to $334.5 million, of which $269.5 million (net of federal benefit) would affect the Company’s effective tax rate, if recognized. As of December 31, 2008, the Company’s gross cumulative unrecognized tax benefits amounted to $330.0 million. Additionally, the Company recognized a gross liability of $75.1 million and $70.9 million for interest related to its unrecognized tax benefits as of March 31, 2009 and December 31, 2008, respectively. Interest expense related to unrecognized tax benefits was $7.6 million for the three month period ended March 31, 2009, compared to $4.3 million for the same period in 2008. The Company continually evaluates the unrecognized tax benefits associated with its uncertain tax positions. It is reasonably possible that the total UTBs could significantly increase or decrease during the next 12 months due to completion of tax authority examinations and the expiration of statutes of limitations. However, an estimate of the range of the change in the total amount of UTBs cannot be made currently.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

The Company’s federal returns through 2004 have been examined by the Internal Revenue Service (“IRS”) and issues for tax years 1997 through 2004 are still in dispute. The Company has paid the amounts assessed by the IRS in full for tax years 1997 and 1998 and has filed refund claims with the IRS related to the disputed issues for those two years. An IRS examination of the Company’s 2005 and 2006 Federal income tax returns is currently in progress. Generally, the state jurisdictions in which the Company files income tax returns are subject to examination for a period from three to seven years after returns are filed.

Note 9 - Employee Benefit Plans

Stock Based Compensation

The weighted average fair values of options granted during the first three months of 2009 and 2008 were $4.73 per share and $8.46 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

     Three Months Ended March 31
     2009    2008

Expected dividend yield

   4.42  %      4.58  %  

Expected stock price volatility

   84.20            21.73       

Risk-free interest rate (weighted average)

   1.99            2.87       

Expected life of options

   6 years            6 years       

The following table presents a summary of stock option and performance and restricted stock activity:

 

     Stock Options    Performance and Restricted Stock
(Dollars in thousands except per share data)          Shares          Price
Range
   Weighted
Average
    Exercise Price    
         Shares          Deferred
Compensation
   Weighted
Average
    Grant Price    

Balance, January 1, 2009

   15,641,872       $17.06 - $150.45      $65.29      3,803,412       $113,394       $64.61  

Granted

   3,115,614       9.06      9.06      2,030,880       18,400       9.06  

Exercised/vested

   -       -      -      (954,438)      -       63.95  

Cancelled/expired/forfeited

   (301,475)      35.84 - 149.81      62.48      (60,273)      (3,526)      58.49  

Amortization of compensation element

  of performance and restricted stock

   -       -      -      -       (20,283)      -  
                             

Balance, March 31, 2009

   18,456,011       $9.06 - $150.45      $55.84      4,819,581       $107,985       $41.41  
                             
                 
                     

Exercisable, March 31, 2009

   13,260,722          $65.30           
                     

Available for additional grant, March 31, 2009 1

   5,910,504                  
                   

1 Includes 2,130,597 shares available to be issued as restricted stock.

The following table presents information on stock options by ranges of exercise price at March 31, 2009:

(Dollars in thousands except per share data)

 

    Options Outstanding   Options Exercisable
Range of Exercise
Prices
  Number
Outstanding at
March 31,
2009
  Weighted-
Average
Exercise Price
  Weighted-
Average
Remaining
  Contractual Life  
(Years)
      Aggregate    
Intrinsic
Value
  Number
Exercisable at
  March 31, 2009  
  Weighted-
Average Exercise
Price
  Weighted-
Average
Remaining
Contractual
  Life (Years)  
    Aggregate  
Intrinsic
Value

  $9.06 to $49.46

  3,926,980     $15.25     8.98     $8,350     511,366     $44.57     3.07     $-  

  $49.47 to $64.57

  5,253,259     56.49     3.01     -     5,253,259     56.49     3.01     -  

  $64.58 to $150.45

  9,275,772     72.66     5.39     -     7,496,097     72.89     4.64     -  
                             
  18,456,011     $55.84     5.48     $8,350     13,260,722     $65.30     3.94     $-  
                               

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

Stock-based compensation expense recognized in noninterest expense was as follows:

 

     Three Months Ended
March 31
(In thousands)          2009               2008      

Stock-based compensation expense:

    

Stock options

   $2,913     $3,484  

Performance and restricted stock

   20,283     10,148  
        

Total stock-based compensation expense

   $23,196     $13,632  
        

The recognized stock-based compensation tax benefit amounted to $8.8 million and $5.2 million for the three months ended March 31, 2009 and 2008, respectively.

Certain employees received long-term deferred cash awards during the first quarter of 2008 and 2009, which were subject to a three year vesting requirement. The accrual related to these deferred cash grants was $13.1 million and $1.4 million as of March 31, 2009 and 2008, respectively.

Retirement Plans

SunTrust did not contribute to either of its noncontributory qualified retirement plans (“Retirement Benefits” plans) in the first quarter of 2009. The expected long-term rate of return on plan assets for the Retirement Benefit plans is 8.00% for 2009.

Anticipated employer contributions/benefit payments for 2009 are $24.0 million for the Supplemental Retirement Benefit plans. For the first quarter of 2009, the actual contributions/benefit payments totaled $1.2 million.

SunTrust contributed $0.1 million to the Postretirement Welfare Plan in the first quarter of 2009. Additionally, SunTrust expects to receive a Medicare Subsidy reimbursement in the amount of $3.3 million. The expected pre-tax long-term rate of return on plan assets for the Postretirement Welfare plan is 7.25% for 2009.

 

   

Three Months Ended March 31

   

2009

  

2008

(Dollars in thousands)  

      Pension      
      Benefits      

  

  Other  

  Postretirement  
  Benefits  

  

     Pension     
     Benefits     

  

  Other

  Postretirement  
  Benefits

Service cost

  $18,856       $73       $19,468       $155   

Interest cost

  30,063       2,803       29,273       2,953   

Expected return on plan assets

  (37,558)      (1,758)      (46,414)      (2,047)  

Amortization of prior service cost

  (2,721)       (390)      (2,792)      (390)  

Recognized net actuarial loss

  32,456       4,648       5,556      3,187   
                  

Net periodic benefit cost

  $41,096       $5,376       $5,091      $3,858   
                  

Note 10 - Derivative Financial Instruments

The Company enters into various derivative financial instruments, as defined by SFAS No. 133, both in a dealer capacity to facilitate client transactions and as an end user as a risk management tool. Where derivatives have been entered into with clients, the Company generally manages the risk associated with these derivatives within the framework of its value-at-risk (“VaR”) approach that monitors total exposure daily and seeks to manage the exposure on an overall basis. Derivatives are used as a risk management tool to hedge the Company’s exposure to changes in interest rates or other identified market risks, either economically or in accordance with the hedge accounting provisions of SFAS No. 133. The Company may also enter into derivatives, on a limited basis, to capitalize on trading opportunities in the market. In addition, as a normal part of its operations, the Company enters into interest rate lock commitments (“IRLCs”) on mortgage loans that are accounted for as freestanding derivatives under SFAS No. 133 and has certain contracts containing embedded derivatives that are carried, in their entirety, at fair value under SFAS No. 155 or SFAS No. 159. All derivatives are carried at fair value in the Consolidated Balance Sheets in trading assets, other assets, trading liabilities, or other liabilities. The associated gains and losses are either recorded in other comprehensive income, net of tax, or within the Consolidated Statements of Income depending upon the use and designation of the derivatives.

Derivatives offered to clients include interest rate, credit, equity, commodity, and foreign exchange contracts. The Company’s risk management derivatives are based on underlying risks primarily related to interest rates, equity valuations, foreign exchange rates,

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

or credit, and include swaps, options, swaptions, credit default swaps (“CDS”), currency swaps, and futures and forwards. Swaps are contracts in which a series of net cash flows, based on a specific notional amount that is related to an underlying risk, are exchanged over a prescribed period. Options, generally in the form of caps and floors, are contracts that transfer, modify, or reduce an identified risk in exchange for the payment of a premium when the contract is issued. Swaptions are contracts that provide the option to enter into a specified swap agreement with the issuer on a specified future date. CDS provide credit protection for the buyer of the contract through a guarantee, by the seller of the contract, of the creditworthiness of the underlying fixed income product. Currency swaps involve the exchange of principal and interest in one currency for another. Futures and forwards are contracts for the delayed delivery or net settlement of an underlying, such as a security or interest rate index, in which the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying.

Credit and Market Risk Associated with Derivatives

Derivatives expose the Company to credit risk. If the counterparty fails to perform, the credit risk at that time would be equal to the net derivative asset position, if any, for that counterparty. The Company minimizes the credit or repayment risk in derivatives by entering into transactions with high credit-quality counterparties that are reviewed periodically by the Company’s Credit Risk Management division. The Company’s derivatives may also be governed by an International Swaps and Derivatives Associations Master Agreement (“ISDA”); depending on the nature of the derivative transactions, bilateral collateral agreements may be in place as well. When the Company has more than one outstanding derivative transaction with a single counterparty and there exists a legally enforceable master netting agreement with the counterparty, the Company considers its exposure to the counterparty to be the net market value of all positions with that counterparty if such net value is an asset to the Company and zero if such net value is a liability to the Company. As of March 31, 2009, net derivative asset positions to which the Company was exposed to risk of its counterparties were $3.3 billion, representing the net of $4.1 billion in net derivative gains by counterparty, netted by counterparty where formal netting arrangements exist, adjusted for collateral of $0.8 billion that the Company holds in relation to these gain positions. As of December 31, 2008, net derivative asset positions to which the Company was exposed to risk of its counterparties were $3.5 billion, representing the net of $4.6 billion in derivative gains by counterparty, netted by counterparty where formal netting arrangements exist, adjusted for collateral of $1.1 billion that the Company holds in relation to these gain positions.

Derivative instruments are primarily transacted in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For purposes of valuation adjustments to its derivative positions under SFAS No. 157, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit. The Company has considered factors such as the likelihood of default by itself and its counterparties, its net exposures, and remaining maturities in determining the appropriate fair value adjustments to record. Generally, the expected loss of each counterparty is estimated using the Company’s proprietary internal risk rating system. The risk rating system utilizes counterparty specific probabilities of default and loss given default estimates to derive the expected loss. For counterparties that are rated by national rating agencies, those ratings are also considered in estimating the credit risk. In addition, counterparty exposure is evaluated by netting positions that are subject to master netting arrangements, as well as considering the amount of marketable collateral securing the position. Specifically approved counterparties and exposure limits are defined. The approved counterparties are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. This approach used to estimate exposures to counterparties is also used by the Company to estimate its own credit risk on derivative liability positions. To date, no material losses due to a counterparty’s inability to pay any net uncollateralized position has been incurred. The Company adjusted the net fair value of its derivative contracts for estimates of net counterparty credit risk by approximately $26.2 million and $23.1 million as of March 31, 2009 and December 31, 2008, respectively.

The majority of the Company’s consolidated derivatives contain contingencies that relate to the creditworthiness of the Bank. These are contained in industry standard master trading agreements as events of default. Should the Bank be in default under any of these provisions, the Bank’s counterparties would be permitted under such master agreements to close-out net at amounts that would approximate the then-fair values of the derivatives and the netting of the amounts would produce 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. In addition, of the Company’s total derivative liability positions, approximately $1.8 billion in fair value contain provisions conditioned on downgrades of the Bank’s credit rating. These provisions, if triggered, would either give rise to an additional termination event (“ATE”) that permits the counterparties to close-out net and apply collateral or, where a Credit Support Annex (“CSA”) is present, require the Bank to post additional collateral. Collateral posting requirements generally result from differences in the fair value of the net derivative liability compared to specified collateral thresholds at different ratings levels of the Bank, both of which are negotiated provisions within each CSA. At March 31, 2009, the Bank carried long-term senior debt ratings of A+/Aa3 from two of the major ratings agencies, which were lowered to A-/A2 subsequent to March 31, 2009. For illustrative purposes, if the Bank were downgraded to BBB-/Baa3, ATEs would be triggered in derivative liability contracts that had a fair value of approximately

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

$32.7 million at March 31, 2009, against which the Bank had posted collateral of approximately $11.0 million; ATEs do not exist at lower ratings levels. At March 31, 2009, approximately $1.8 billion in fair value of derivative liabilities are subject to CSAs, against which the Bank has posted approximately $1.6 billion in collateral. If requested by the counterparty per the terms of the CSA, the Bank would be required to post estimated additional collateral against these contracts of approximately $131.4 million if the Bank were downgraded to BBB-/Baa3, and any further downgrades to BB+/Ba1 or below would require the posting of an additional $22.2 million. The downgrades subsequent to March 31, 2009 did not have a significant impact on the Company’s collateral position or liquidity. Such collateral posting amounts may be more or less than the Bank’s estimates based on the specified terms of each CSA as to the timing of a collateral calculation and whether the Bank and its counterparties differ on their estimates of the fair values of the derivatives or collateral.

Derivatives also expose the Company to market risk. Market risk is the adverse effect that a change in interest rates, currency rates, equity prices or implied volatility has on the value of a derivative. The Company manages the market risk associated with its derivatives by establishing and monitoring limits on the types and degree of risk that may be undertaken. The Company continually measures this risk by using a VaR methodology.

The table below reflects the Company’s positions in derivatives at March 31, 2009. The notional amounts in the table are presented on a gross basis and have been classified within Asset Derivatives or Liability Derivatives based on the estimated fair value of the individual contract at March 31, 2009. For contracts constituting a combination of options that contain a written component and a purchased component (such as a collar), the notional amount of each component is presented separately, with the purchased component being presented as an Asset Derivative and the written component being presented as a Liability Derivative. The fair value of each combination of options is presented with the purchased component, if the combined fair value of the components is positive, and with the written component if negative. On the Consolidated Balance Sheets, the fair values of derivatives with counterparties with master netting agreements are recorded on a net basis in accordance with the provisions of FIN 39. However, for purposes of the table below, the gross positive and gross negative fair value amounts associated with the respective notional amounts are presented without consideration of any netting agreements, in accordance with the provisions of SFAS No. 161.

 

    

Asset Derivatives

  

Liability Derivatives

(Dollars in thousands)   

Balance Sheet
    Classification    

           Notional        
Values
          Fair Value         

Balance Sheet
    Classification    

           Notional        
Values
          Fair Value      

Derivatives designated in cash flow hedging relationships under SFAS No. 133

Equity contracts hedging the following:

               

Securities available for sale

  

Trading assets

   $1,546,752       $259,529         $1,546,752       $-      

 

Interest rate contracts hedging the following:

               

Floating rate loans

  

Trading assets

   10,000,000       1,227,087         -           -      

Floating rate certificates of deposits

      -           -         

Trading liabilities

   2,000,000       48,638  
                           

Total

      $11,546,752       $1,486,616         $3,546,752       $48,638  
                           

Derivatives not designated as hedging instruments under SFAS No. 133

Interest rate contracts hedging the following:

               

Fixed rate debt

  

Trading assets

   $3,223,085       $339,292     

Trading liabilities

   $295,000       $33,154  

Corporate bond holdings

      -           -         

Trading liabilities

   110,000       14,526  

Loans

      -           -         

Trading liabilities

   7,411       177  

MSRs

  

Other assets

   7,010,000       101,425     

Other liabilities

   2,250,000       5,991  

LHFS, IRLCs, LHFI-FV3

  

Other assets

   7,781,326   4   43,650     

Other liabilities

   8,835,776   4   105,336  

N/A-Trading activity

  

Trading assets

   111,152,187   1   4,512,624     

Trading liabilities

   109,633,936       4,287,856  

Foreign exchange rate contracts hedging the following:

               

Foreign-denominated debt

  

Trading assets

   1,185,729       20,626     

Trading liabilities

   573,860       210,887  

Commercial loans

  

Trading assets

   30,128       341         -           -      

N/A-Trading activity

  

Trading assets

   3,740,122       206,784     

Trading liabilities

   3,569,055       182,194  

Credit contracts hedging the following:

               

Loans

  

Trading assets

   340,000       12,073     

Trading liabilities

   38,750       856  

N/A-Trading activity

  

Trading assets

   591,617   2   106,363     

Trading liabilities

   548,115   2   97,315  

Equity contracts - Trading activity

  

Trading assets

   4,003,268   1   374,271     

Trading liabilities

   6,944,217       416,521  

Other contracts:

               

IRLCs

  

Other assets

   7,929,691       106,699     

Other liabilities

   88,168       472  

Trading activity

  

Trading assets

   7,328       4,182     

Trading liabilities

   7,176       4,107  
                           

Total

      $146,994,481       $5,828,330         $132,901,464       $5,359,392  
                           

Total derivatives

      $158,541,233       $7,314,946         $136,448,216       $5,408,030  
                           

1 Amounts include $23.1 billion and $171.5 million of notional related to interest rate futures and equity futures, respectively. These futures contracts settle in cash daily and therefore no derivative asset or liability is recorded.

2 Asset and liability amounts include $2.7 million and $13.0 million, respectively, of notional from purchased and written interest rate swap risk participation agreements, respectively, which notional is calculated as the notional of the interest rate swap participated adjusted by the relevant risk weighted assets conversion factor.

3 Items contained here that are not previously defined include “LHFS” & “LHFI-FV” which are loans held for sale and loans held for investment carried at fair value, respectively.

4 Futures contracts settle in cash daily and therefore, no derivative asset or liability is recorded in this respective line for such contracts.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

The impacts of derivative financial instruments on the Consolidated Income Statement for the three months ended March 31, 2009 is presented below. The impacts are segregated between those derivatives that are designated in hedging relationships under SFAS No. 133 and those that are used for economic hedging or trading purposes, with further identification of the underlying risks in the derivatives and the hedged items, where appropriate. The tables do not disclose the financial impact of the activities that these derivative instruments are intended to hedge, for both economic hedges and those instruments designated in formal SFAS No. 133 relationships.

 

(Dollars in thousands)

Derivatives in SFAS No. 133 cash flow
hedging relationships

  

Amount of pre-tax gain/(loss)

Recognized in

OCI on Derivative

(Effective Portion)

  

Classification of gain/(loss)

Reclassified from

AOCI into Income

(Effective Portion)

  

Amount of pre-tax gain/(loss)

Reclassified from

AOCI into Income

(Effective Portion)1

        

Equity contracts hedging the following:

        

Securities available for sale

   $9,982         $-  

Interest rate contracts hedging the following:

        

Floating rate loans

   53,049      Interest and fees on loans    109,031  

Floating rate certificates of deposits

   (821)     Interest on deposits    (22,988) 

Floating rate debt

   (15)     Interest on long-term debt    (1,333) 
            

Total

   $62,195         $84,710  
            
(Dollars in thousands)               
Derivatives not designated as hedging
instruments under SFAS No. 133
  

Classification of gain/(loss) Recognized in

Income on Derivative

  

Amount of gain/(loss) Recognized in
Income on Derivatives

  

Interest rate contracts hedging the following:

        

Fixed rate public debt

   Trading account profits and commissions    ($27,944)    

Corporate bond holdings

   Trading account profits and commissions    2,410     

Loans

   Trading account profits and commissions    (5)    

MSRs

   Mortgage servicing income    61,211     

LHFS, IRLCs, LHFI-FV

   Mortgage production income    (106,631)    

N/A-Trading activity

   Trading account profits and commissions    11,195     

 

Foreign exchange rate contracts hedging the following:

        

Foreign-denominated debt

   Trading account profits and commissions    (79,189)    

Commercial loans

   Trading account profits and commissions    450     

N/A-Trading activity

   Trading account profits and commissions    35,119     

 

Credit contracts hedging the following:

        

Loans

   Trading account profits and commissions    (2,761)    

Other

   Trading account profits and commissions    7,868     

 

Other contracts:

        

IRLCs

   Mortgage production income    277,622     

Other

   Trading account profits and commissions    33     

Trading activity

   Trading account profits and commissions    33,538     
          

Total

      $212,916     
          

1 During the quarter ending March 31, 2009, the Company also reclassified $8.4 million in pre-tax gains from AOCI into net interest income. These gains related to hedging relationships under SFAS No. 133 that have been previously terminated or dedesignated.

Credit Derivatives

As part of its trading businesses, the Company enters into contracts that are, in form or substance, written guarantees: specifically, CDS, swap participations and TRS. The Company accounts for these contracts as derivative instruments in accordance with the provisions of SFAS No. 133 and, accordingly, records these contracts at fair value, with changes in fair value recorded in trading account profits and commissions.

The Company has written CDS, on a limited basis, that are agreements under which the Company receives premium payments from its counterparty for protection against an event of default of a reference asset. In the event of default under the CDS, the Company would either net cash settle or make a cash payment to its counterparty and take delivery of the defaulted reference asset, from which the Company may recover all, a portion or none of the credit loss, depending on the performance of the reference asset. Events of default, as defined in the CDS agreements, are generally triggered upon the failure to pay and similar events related to the issuer(s) of the reference asset. As of March 31, 2009, all written CDS contracts reference single name corporate credits or corporate credit indices. When the Company has written CDS, it has generally entered into offsetting CDS for the underlying reference asset, under which the Company paid a premium to its counterparty for protection against an event of default on the reference asset. The counterparties to these purchased CDS are of high creditworthiness and have ISDA agreements in place that subject the CDS to master netting provisions, thereby mitigating the risk of non-payment to the Company. As such, at March 31, 2009, the Company does not have any significant risk of making a non-recoverable payment on any written CDS. During 2009 and 2008, the only instances of default on written CDS were driven by credit indices with

 

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constituent credit default. In all cases where the Company made resulting cash payments to settle, the Company collected like amounts from the counterparties to the offsetting purchased CDS. At March 31, 2009, the written CDS had remaining terms of approximately three months to six years. The maximum guarantees outstanding at March 31, 2009 and December 31, 2008, as measured by the gross notional amounts of written CDS, were $195.8 million and $190.8 million, respectively. At March 31, 2009 and December 31, 2008, the gross notional amounts of purchased CDS contracts, which represent benefits to, rather than obligations of, the Company, were $249.6 million and $245.2 million, respectively. The fair values of the written CDS were $29.0 million and $34.7 million at March 31, 2009 and December 31, 2008, respectively, and the fair values of the purchased CDS were $36.4 million and $45.8 million at March 31, 2009, and December 31, 2008, respectively.

The Company writes swap participations, which are credit derivatives whereby the Company has guaranteed payment to a dealer counterparty in the event that the counterparty experiences a loss on a derivative instrument, such as an interest rate swap, due to a failure to pay by the counterparty’s customer (the “obligor”) on that derivative instrument. The Company monitors its payment risk on its swap participations by monitoring the creditworthiness of the obligors, which is based on the normal credit review process the Company would have performed had it entered into the derivative instruments directly with the obligors, that are all corporations or partnerships. At March 31, 2009, the remaining terms on these swap participations generally ranged from one to nine years, with a weighted average on the maximum estimated exposure of 3.8 years. The Company’s maximum estimated exposure to written swap 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 $128.0 million and $125.7 million at March 31, 2009 and December 31, 2008, respectively. The fair values of the written swap participations were de minimis at March 31, 2009 and December 31, 2008. As part of its trading activities, the Company may enter into purchased swap participations, but such activity is not matched, as discussed herein related to CDS or TRS.

The Company has also entered into TRS contracts on loans. In certain of these contracts, the Company would be required to pay the depreciated value, if any, of the underlying reference asset upon termination of the TRS; in this manner, a TRS functions similar to a guarantee. However, the terms of the TRS would also entitle the Company to receive the appreciated value, if any, of the underlying reference asset, which is different from traditional guarantees. The Company’s TRS business consists of matched trades, such that when the Company pays depreciation on one TRS, it receives the same depreciation on the matched TRS. As such, the Company does not have any long or short exposure, other than credit risk of its counterparty, which is managed through collateralization. The Company typically receives initial cash collateral from the counterparty upon entering into the TRS and is entitled to additional collateral as the fair value of the underlying reference assets deteriorate. At March 31, 2009 and December 31, 2008, the Company had outstanding $339.3 million and $602.1 million, respectively, of outstanding and offsetting TRS notional balances. The fair values of the TRS derivative liabilities were $68.2 million and $166.6 million at March 31, 2009 and December 31, 2008, respectively. The fair values of the offsetting TRS derivative assets at March 31, 2009 and December 31, 2008 were $69.9 million and $171.0 million, respectively, and related collateral held at March 31, 2009 and December 31, 2008 was $153.1 million and $296.8 million, respectively. As of December 31, 2008, the Company had decided to exit its TRS business, and the Company is in the process of unwinding the positions. The Company has not incurred any losses on these unwinds to date and does not expect to incur any, as the TRS trades have been appropriately collateralized and payables and receivables resulting from depreciation or appreciation of the referenced assets will offset.

Cash Flow Hedges

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 employs 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 establishes parameters for derivative usage, including identification of assets and liabilities to hedge, derivative instruments to be utilized, and notional amounts of hedging relationships. At March 31, 2009, the Company’s only outstanding SFAS No. 133 hedging relationships relate to interest rate swaps and equity forwards that have been designated as cash flow hedges of probable forecasted transactions related to recognized assets and liabilities.

Interest rate swaps have been designated as hedging the exposure to the benchmark interest rate risk associated with floating rate loans, certificates of deposit, and debt. The maximum range of hedge maturities for asset hedges is approximately five to seven years, with the weighted average being approximately 4.4 years; such maximum range for liability hedges is less than one year,

 

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with the weighted average being approximately 0.3 years. Ineffectiveness on these hedges was de minimis during the three months ended March 31, 2009. As of March 31, 2009, $251.1 million, net of tax, of the deferred net gains on derivatives that are recorded in accumulated other comprehensive income are expected to be reclassified to net interest income over the next nine months in connection with the recognition of interest income or interest expense on the hedged item.

During the third quarter of 2008, the Company executed equity forward agreements (the “Agreements”) on 30 million common shares of The Coca Cola Company (“Coke”). A consolidated subsidiary of SunTrust Banks, Inc. owns approximately 22.9 million Coke common shares and a consolidated subsidiary of SunTrust Bank owns approximately 7.1 million Coke common shares. These two subsidiaries entered into separate Agreements on their respective holdings of Coke common shares with a large, unaffiliated financial institution (the “Counterparty”). Execution of the Agreements (including the pledges of the Coke common shares pursuant to the terms of the Agreements) did not constitute a sale of the Coke common shares under U.S. GAAP for several reasons, including that ownership of the common shares was not legally transferred to the Counterparty. The Agreements, in their entirety, are derivatives based on the criteria in SFAS No. 133. The Agreements resulted in zero cost equity collars pursuant to the provisions of SFAS No. 133. In accordance with the provisions of SFAS No. 133, the Company has designated the Agreements as cash flow hedges of the Company’s probable forecasted sales of its Coke common shares, which are expected to occur in approximately six and a half and seven years from the Agreements’ effective date, for overall price volatility below the strike prices on the floor (purchased put) and above the strike prices on the ceiling (written call). Although the Company is not required to deliver its Coke common shares under the Agreements, the Company has asserted that it is probable, as defined by SFAS No. 133, that it will sell all of its Coke common shares at or around the settlement date of the Agreements. The Federal Reserve’s approval for Tier 1 Capital was significantly based on this expected disposition of the Coke common shares under the Agreements or in another market transaction. Both the sale and the timing of such sale remain probable to occur as designated. At least quarterly, the Company assesses hedge effectiveness and measures hedge ineffectiveness with the effective portion of the changes in fair value of the Agreements generally recorded in accumulated other comprehensive income and any ineffective portions generally recorded in trading gains and losses. None of the components of the Agreements’ fair values are excluded from the Company’s assessments of hedge effectiveness. Potential sources of ineffectiveness include changes in market dividends and certain early termination provisions. The Company did not recognize any ineffectiveness during 2008 and ineffectiveness was de minimis during the first three months of 2009. Other than potential measured hedge ineffectiveness, no amounts will be reclassified from accumulated other comprehensive income over the next nine months and any remaining amounts recorded in accumulated other comprehensive income will be reclassified to earnings when the probable forecasted sales of the Coke common shares occur.

Economic Hedging and Trading Activities

In addition to designated SFAS No. 133 hedging relationships, the Company also enters into derivatives as an end user as a risk management tool to economically hedge risks associated with certain non-derivative and derivative instruments, along with entering into derivatives in a trading capacity with its clients.

The primary risks that the Company economically hedges are interest rate risk, foreign exchange risk, and credit risk. The economic hedging activities are accomplished by entering into individual derivatives or by using derivatives on a macro basis, and generally accomplish the Company’s goal of mitigating the targeted risk. To the extent that specific derivatives are associated with specific hedged items, the notional amounts, fair values, and gains/(losses) on the derivatives are illustrated in the tables above.

 

   

The Company utilizes interest rate derivatives to mitigate exposures from various instruments.

 

  ¡  

The Company is subject to interest rate risk on its fixed rate debt. As market interest rates move, a portion of the fair value of the Company’s debt is affected. To protect against this risk on certain debt issuances that the Company has elected to carry at fair value, the Company has entered into pay variable-receive fixed interest rate swaps (in addition to entering into certain non-derivative instruments on a macro basis) that decrease in value in a rising rate environment and increase in value in a declining rate environment.

 

  ¡  

The Company is exposed to interest rate risk associated with MSRs, which the Company hedges with a combination of derivatives, including MBS forward and option contracts and interest rate swap and swaption contracts.

 

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  ¡  

The Company enters into MBS forward and option contracts, interest rate swap and swaption contracts, futures contracts, and eurodollar options to mitigate interest rate risk associated with IRLCs, mortgage loans held for sale and mortgage loans held for investment.

 

   

The Company is exposed to foreign exchange rate risk associated with certain senior notes denominated in euros and pound sterling. This risk is economically hedged by entering into cross currency swaps, which swaps receive either euros or pound sterling and pay U.S. dollars. Interest expense on the Consolidated Statements of Income reflects only the contractual interest rate on the debt based on the spot exchange rate, while fair value changes on the derivatives and valuation adjustments under SFAS No. 52 on the debt are both recorded within trading account profits and commissions.

 

   

The Company enters into CDS to hedge credit risk associated with certain loans held within its Corporate and Investment Banking and Wealth and Investment Management lines of business.

Trading Activity, in the tables above, primarily include interest rate swaps, equity derivatives, CDS, TRS, futures, options and foreign currency contracts. 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 in certain macro-hedging strategies. The macro-hedging strategies are focused on managing the Company’s overall interest rate risk exposure that is not otherwise hedged by derivatives under SFAS No. 133 or in connection with specific hedges and, therefore, the Company does not specifically associate individual derivatives with specific assets or liabilities.

Note 11 - Reinsurance Arrangements and Guarantees

Reinsurance

The Company provides mortgage reinsurance on certain mortgage loans through contracts with several primary mortgage insurance companies. Under these contracts, the Company provides aggregate excess loss coverage in a mezzanine layer in exchange for a portion of the pool’s mortgage insurance premium. As of March 31, 2009, approximately $17.0 billion of mortgage loans were covered by such mortgage reinsurance contracts. The reinsurance contracts are intended to place limits on the Company’s maximum exposure to losses by defining the loss amounts ceded to the Company as well as by establishing trust accounts for each contract. The trust accounts, which are comprised of funds contributed by the Company plus premiums earned under the reinsurance contracts, are maintained to fund claims made under the reinsurance contracts. If claims exceed funds held in the trust accounts, the Company does not intend to make additional contributions beyond future premiums earned under the existing contracts.

At March 31, 2009, the total loss exposure ceded to the Company was approximately $680 million; however, the maximum amount of loss exposure based on funds held in each separate trust account, including net premiums due to the trust accounts, was limited to $267.4 million. Of this amount, $250.0 million of losses have been reserved for as of March 31, 2009, reducing our net remaining loss exposure to $17.4 million. Future reported losses may exceed $17.4 million since future premium income will increase the amount of funds held in the trust; however, future cash losses, net of premium income, are not expected to exceed $17.4 million. The amount of future premium income is limited to the population of loans currently outstanding since additional loans are not being added to the reinsurance contracts beginning in 2009, and future premium income could be significantly curtailed to the extent we agree to relinquish control of individual trusts to the mortgage insurance companies. Premium income, which totaled $13.3 million and $17.7 million for the three month periods ended March 31, 2009 and March 31, 2008, respectively, are reported as part of noninterest income. The related provision for losses, which total $70.0 million and $7.0 million for the three month periods ended March 31, 2009 and March 31, 2008, respectively, is reported as part of noninterest expense.

As noted above, the reserve for estimated losses incurred under its reinsurance contracts totaled $250.0 million at March 31, 2009. Our evaluation of the required reserve amount includes an estimate of claims to be paid by the trust related to loans in default and as assessment of the sufficiency of future revenues, including premiums and investment income on funds held in the trusts, to cover future claims.

Guarantees

The Company has undertaken certain guarantee obligations in the ordinary course of business. In following the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” the Company must consider guarantees that have any of the following four characteristics: (i) contracts that contingently require the guarantor to make payments to a guaranteed party based on changes in an underlying factor that is related to an asset, a liability, or an equity security of the guaranteed party; (ii) contracts that contingently require the guarantor to make payments to a guaranteed party based on another entity’s failure to perform under an obligating agreement; (iii) indemnification agreements that contingently require

 

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the indemnifying party to make payments to an indemnified party based on changes in an underlying factor that is related to an asset, a liability, or an equity security of the indemnified party; and (iv) indirect guarantees of the indebtedness of others. The issuance of a guarantee imposes an obligation for the Company to stand ready to perform, and should certain triggering events occur, it also imposes an obligation to make future payments. Payments may be in the form of cash, financial instruments, other assets, shares of stock, or provisions of the Company’s services. The following is a discussion of the guarantees that the Company has issued as of March 31, 2009, which have characteristics as specified by FIN 45. In addition, the Company has entered into certain contracts that are similar to guarantees, but that are accounted for as derivatives (see Note 10 “Derivative Financial Instruments,” to the Consolidated Financial Statements).

Visa

The Company issues and acquires credit and debit card transactions through the Visa, U.S.A. Inc. card association or its affiliates (collectively “Visa”). On October 3, 2007, Visa completed a restructuring and issued shares of Class B Visa Inc. common stock to its financial institution members, including the Company, in contemplation of an initial public offering (“IPO”), which occurred in March 2008. As of March 31, 2009, SunTrust had 3.2 million of Visa Inc. Class B shares, the equivalent to 2.0 million Class A shares of Visa Inc. based on the current conversion factor, which is subject to adjustment depending on the outcome of certain specifically defined litigation. The Class B shares are not transferable until the latter of the third anniversary of the IPO closing, or the date which certain specifically defined litigation has been resolved; therefore, the Class B shares are classified in other assets and accounted for at their carryover basis, which is $0 as of March 31, 2009.

The Company is a defendant, along with Visa U.S.A. Inc. and MasterCard International (the “Card Associations”), as well as several other banks, in one of several antitrust lawsuits challenging the practices of the Card Associations (the “Litigation”). The Company has 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 the restructuring, a provision of the original Visa By-Laws, Section 2.05j, was restated in Visa’s certificate of incorporation. Section 2.05j contains a general indemnification provision between a Visa member and Visa, and explicitly provides that after the closing of the restructuring, each member’s indemnification obligation is limited to losses arising from its own conduct and the specifically defined Litigation. The maximum potential amount of future payments that the Company could be required to make under this indemnification provision cannot be determined as there is no limitation provided under the By-Laws and the amount of exposure is dependent on the outcome of the Litigation. As a result of the indemnification provision in Section 2.05j of the Visa By-Laws and/or the indemnification provided through the judgment or loss sharing agreements, the Company estimated the fair value of the net guarantee to be $43.5 million as of March 31, 2009 and December 31, 2008. During 2008, Visa funded $4.1 billion into an escrow account, established for the purposes of funding judgments in, or settlements of, the Litigation. While the Company could be required to separately fund its proportionate share of the Litigation losses, it is expected that the escrow account will be used to pay all or a substantial amount of the losses. Therefore, the net guarantee liability of $43.5 million recorded as of March 31, 2009 includes the Company’s proportionate share of the $4.1 billion in escrow funding. A high degree of subjectivity was used in estimating the fair value of the guarantee obligation and the ultimate cost to the Company could be significantly higher or lower than the liability recorded as of March 31, 2009.

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 commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients and 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. Commercial letters of credit are specifically excluded from the disclosure and recognition requirements of FIN 45.

As of March 31, 2009 and December 31, 2008, the maximum potential amount of the Company’s obligation was $13.1 billion and $13.8 billion, respectively, for financial and performance standby letters of credit. The Company has recorded $157.7 million and $141.9 million in other liabilities for unearned fees related to these letters of credit as of March 31, 2009 and December 31, 2008, respectively. The Company’s outstanding letters of credit generally have a term of less than one year but may extend longer than one year. If a letter of credit is drawn upon, the Company may seek recourse through the client’s underlying obligation. If the client’s line of credit is also in default, the Company may take possession of the collateral securing the line 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 credit policies. Some standby letters of credit are designed to be drawn upon and others are drawn upon only under circumstances of dispute or default in the underlying transaction to which

 

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the bank is not a party. In all cases, the bank holds the right to reimbursement from the applicant and may or may not also hold collateral to secure that right. An internal assessment of the probability of default and loss severity in the event of default is assessed consistent with the methodologies used for all commercial borrowers and the management of risk regarding letters of credit leverages the risk rating process to focus higher visibility on the higher risk and higher dollar letters of credit.

Loan Sales

SunTrust Mortgage, Inc. (“STM”), a consolidated subsidiary of SunTrust, originates and purchases consumer residential mortgage loans, a portion of which are sold to outside investors in the normal course of business. When mortgage loans or MSRs are sold, representations and warranties regarding certain attributes of the loans sold are made to the third party purchaser. These representations and warranties may extend through the life of the mortgage loan, generally 25 to 30 years. Subsequent to the sale, if inadvertent underwriting deficiencies or documentation defects are discovered in individual mortgage loans, STM will be obligated to repurchase the respective mortgage loan or MSRs and absorb the loss if such deficiencies or defects cannot be cured by STM within the specified period following discovery. STM also maintains a liability for estimated losses on mortgage loans and MSRs that may be repurchased due to breach of general representations and warranties or purchasers’ rights under early payment default provisions. STM’s risk of repurchasing loans under these guarantees is largely driven by borrower payment performance under the terms of the mortgage loans. As of March 31, 2009 and December 31, 2008, $100.5 million was accrued for these repurchases.

Contingent Consideration

The Company has contingent payment obligations related to certain business combination transactions. Payments are calculated using certain post-acquisition performance criteria. The potential liability associated with these arrangements was approximately $12.2 million and $31.8 million as of March 31, 2009 and December 31, 2008, respectively. The Company had no amounts recorded for these guarantees as of March 31, 2009 and December 31, 2008, as these arrangements were all entered into prior to the effective date of FAS 141(R), “Business Combinations”, which requires the fair value of contingent consideration to be recorded as a liability. If required, these contingent payments will be payable at various times over the next five years.

Public Deposits

The Company holds public deposits of various states in which it does business. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit balance in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance and may also require a cross-guarantee among all banks holding public deposits of the individual state. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state’s risk assessment of depository institutions. Certain of the states in which the Company holds public deposits use a pooled collateral method, whereby in the event of default of a bank holding public deposits, the collateral of the defaulting bank is liquidated to the extent necessary to recover the loss of public deposits of the defaulting bank. To the extent the collateral is insufficient, the remaining public deposit balances of the defaulting bank are recovered through an assessment, from the other banks holding public deposits in that state. The maximum potential amount of future payments the Company could be required to make is dependent on a variety of factors, including the amount of public funds held by banks in the states in which the Company also holds public deposits and the amount of collateral coverage associated with any defaulting bank. Individual states appear to be monitoring risk relative to the current economic environment and evaluating collateral requirements and therefore, the likelihood that the Company would have to perform under this guarantee is dependent on whether any banks holding public funds default as well as the adequacy of collateral coverage.

Other

In the normal course of business, the Company enters into indemnification agreements and provides standard representations and warranties in connection with numerous transactions. These transactions include those arising from securitization activities, underwriting agreements, merger and acquisition agreements, loan sales, contractual commitments, payment processing sponsorship agreements, and various other business transactions or arrangements. The extent of the Company’s obligations under these indemnification agreements depends upon the occurrence of future events; therefore, the Company’s potential future liability under these arrangements is not determinable.

SunTrust Investment Services, Inc. (“STIS”) and SunTrust Robinson Humphrey, Inc. (“STRH”), broker-dealer affiliates of SunTrust, use a common third party clearing broker to clear and execute their customers’ securities transactions and to hold customer accounts. Under their respective agreements, STIS and STRH agree to indemnify the clearing broker for losses that

 

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result from a customer’s failure to fulfill its contractual obligations. As the clearing broker’s rights to charge STIS and STRH have no maximum amount, the Company believes that the maximum potential obligation cannot be estimated. However, to mitigate exposure, the affiliate may seek recourse from the customer through cash or securities held in the defaulting customers’ account. For the three month periods ended March 31, 2009 and March 31, 2008, STIS and STRH experienced minimal net losses as a result of the indemnity. The clearing agreements expire in May 2010 for both STIS and STRH.

SunTrust Community Capital, LLC (“SunTrust Community Capital”), a SunTrust subsidiary, previously obtained state and federal tax credits through the construction and development of affordable housing properties and continues to obtain state and federal tax credits through investments as a limited partner in affordable housing developments. SunTrust Community Capital or its subsidiaries are limited and/or general partners in various partnerships established for the properties. If the partnerships generate tax credits, those credits may be sold to outside investors. As of March 31, 2009, SunTrust Community Capital has completed six tax credit sales containing guarantee provisions stating that SunTrust Community Capital will make payment to the outside investors if the tax credits become ineligible. SunTrust Community Capital also guarantees that the general partner under the transaction will perform on the delivery of the credits. The guarantees are expected to expire within a ten year period. As of March 31, 2009, the maximum potential amount that SunTrust Community Capital could be obligated to pay under these guarantees is $38.6 million; however, SunTrust Community Capital can seek recourse against the general partner. Additionally, SunTrust Community Capital can seek reimbursement from cash flow and residual values of the underlying affordable housing properties provided that the properties retain value. As of March 31, 2009 and December 31, 2008, $10.8 million and $11.5 million, respectively, were accrued representing the remainder of tax credits to be delivered, and were recorded in other liabilities on the Consolidated Balance Sheets.

Note 12 - Concentrations of Credit Risk

Credit risk represents the maximum accounting loss that would be recognized at the reporting date if borrowers failed to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country.

Credit risk associated with these concentrations could arise when a significant amount of loans, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment to be adversely affected. The Company does not have a significant concentration of risk to any individual client except for the U.S. government and its agencies. The major concentrations of credit risk for the Company arise by collateral type in relation to loans and credit commitments. The only significant concentration that exists is in loans secured by residential real estate. At March 31, 2009, the Company owned $48.6 billion in residential mortgage loans and home equity lines, representing 39.3% of total loans, and an additional $17.1 billion in commitments to extend credit on home equity loans and $14.7 billion in mortgage loan commitments. At December 31, 2008, the Company had $48.5 billion in residential mortgage loans and home equity lines, representing 38.2% of total loans, and an additional $18.3 billion in commitments to extend credit on home equity loans and $17.0 billion in mortgage loan commitments. The Company originates and retains certain residential mortgage loan products that include features such as interest only loans, high loan to value loans, and low initial interest rate loans. As of March 31, 2009, the Company owned $16.5 billion of interest only loans, primarily with a 10 year interest only period. Approximately $2.0 billion of those loans had combined original loan to value ratios in excess of 80% with no mortgage insurance. Additionally, the Company owned approximately $2.5 billion of amortizing loans with combined loan to value ratios in excess of 80% with no mortgage insurance. The Company attempts to mitigate and control the risk in each loan type through private mortgage insurance and underwriting guidelines and practices. A geographic concentration arises because the Company operates primarily in the Southeastern and Mid-Atlantic regions of the United States.

SunTrust engages in limited international banking activities. The Company’s total cross-border outstanding loans were $795.7 million and $945.8 million as of March 31, 2009 and December 31, 2008, respectively.

Note 13 - Fair Value Election and Measurement

In accordance with SFAS No. 159, the Company has elected to record specific financial assets and financial liabilities at fair value. These instruments include all, or a portion, of the following: fixed rate debt, brokered deposits, loans, loans held for sale, and trading loans. The following is a description of each financial asset and liability class as of March 31, 2009 for which fair value has been elected, including the specific reasons for electing fair value and the strategies for managing the financial assets and liabilities on a fair value basis.

 

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Fixed Rate Debt

The debt that the Company initially elected to carry at fair value was all of its fixed rate debt that had previously been designated in qualifying fair value hedges using receive fixed/pay floating interest rate swaps, pursuant to the provisions of SFAS No. 133. As of March 31, 2009, the fair value of such fixed rate debt was comprised of $3.4 billion of publicly-issued debt. The Company elected to record this debt at fair value in order to align the accounting for the debt with the accounting for the derivatives without having to account for the debt under hedge accounting, thus avoiding the complex and time consuming fair value hedge accounting requirements of SFAS No. 133. This move to fair value introduced earnings volatility due to changes in the Company’s credit spread that was not required to be valued under the SFAS No. 133 hedge designation. Most of the debt, along with certain of the interest rate swaps previously designated as hedges under SFAS No. 133, continues to remain outstanding; however, in February 2009, the Company repaid all of the Federal Home Loan Bank (“FHLB”) advances outstanding and closed out its exposures on the interest rate swaps. Approximately $150.3 million of FHLB stock was redeemed in conjunction with the repayment of the advances.

During the three months ended March 31, 2009, no additional fair value debt was issued and there were no maturities, repurchases or retirements of the fair value debt.

Brokered Deposits

Prior to adopting SFAS No. 159, the Company had adopted the provisions of SFAS No. 155 and elected to carry certain certificates of deposit at fair value. These debt instruments include embedded derivatives that are generally based on underlying equity securities or equity indices, but may be based on other underlyings that are generally not clearly and closely related to the host debt instrument. The Company elected to carry these instruments at fair value in order to remove the mixed attribute accounting model required by SFAS No. 133. The provisions of that statement require bifurcation of a single instrument into a debt component, which would be carried at amortized cost, and a derivative component, which would be carried at fair value, with such bifurcation being based on the fair value of the derivative component and an allocation of any remaining proceeds to the host debt instrument. Since the adoption of SFAS No. 155, but prior to 2009, the Company had elected to carry substantially all newly-issued certificates of deposit at fair value. In cases where the embedded derivative would not require bifurcation under SFAS No. 133, the instrument may be carried at fair value under SFAS No. 159 to allow the Company to economically hedge the embedded features. In 2009, given the continued dislocation in the credit markets, the Company evaluates on an instrument by instrument basis whether a new issuance will be carried at fair value.

Loans and Loans Held for Sale

The Company elects to record at fair value certain newly-originated mortgage loans held for sale based upon defined product criteria. SunTrust chooses to fair value these mortgage loans held for sale in order to eliminate the complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying economic changes in value of the loans and related hedge instruments. This election impacts the timing and recognition of origination fees and costs. Specifically, origination fees and costs, which had been appropriately deferred under SFAS No. 91 and recognized as part of the gain/loss on sale of the loan, are now recognized in earnings at the time of origination. The mark to market adjustments related to loans held for sale and the associated economic hedges is captured in mortgage production income.

Trading Loans

The Company often maintains a portfolio of loans that it trades in the secondary market. Pursuant to the provisions of SFAS No. 159, the Company elected to carry certain trading loans at fair value in order to reflect the active management of these positions. Subsequent to the initial adoption, additional loans were purchased and recorded at fair value as part of the Company’s normal loan trading activities. As of March 31, 2009, approximately $146.9 million of trading loans were outstanding.

In addition to loans carried at fair value in connection with the Company’s loan trading business, the Company has also elected to carry short-term loans made in connection with its total return swap business at fair value. At March 31, 2009, the Company had approximately $339.3 million of such short-term loans carried at fair value, which are included in trading assets.

 

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Valuation Methodologies and Fair Value Hierarchy

The primary financial instruments that the Company carries at fair value include securities, derivative instruments, fixed rate debt, loans and loans held for sale. Classification in the fair value hierarchy of financial instruments is based on the criteria set forth in SFAS No. 157. Financial instruments that have significant unobservable trading activity (i.e., inactive markets), such that the estimates of fair value include significant unobservable inputs, are classified as level 3 instruments. The values were generally based on proprietary models or non-binding broker price indications that estimated the credit and liquidity risk.

The classification of an instrument as level 3 versus level 2 involves judgment based on a variety of subjective factors. A market is considered inactive based on an evaluation of the frequency and size of transactions occurring in a certain financial instrument or similar class of financial instruments. Determining an inactive market requires a judgmental evaluation that includes comparing the recent trading activities to historical experience. If limited trading activity existed and few market participants were willing to transact, as evidenced by wide bid/ask spreads, non-binding indicative bids, or the nature of the market participants, the market was considered to be inactive. Inactive markets necessitate the use of additional judgment when valuing financial instruments, such as pricing matrices, cash flow modeling, and the selection of an appropriate discount rate. The assumptions used to estimate the value of an instrument where the market was inactive were based on the Company’s assessment of the assumptions a market participant would use to value the instrument in an orderly transaction, and included considerations of illiquidity in the current market environment.

Level 3 Instruments

SunTrust used significant unobservable inputs to fair value certain financial and non-financial instruments as of March 31, 2009 and December 31, 2008. The need to use unobservable inputs generally results from the lack of market liquidity, which has resulted in diminished observability of both actual trades and assumptions that would otherwise be available to value these instruments. More specifically, the ABS market, certain residential loan markets, and debt markets have experienced significant dislocation and illiquidity in both new issues and secondary trading. It is reasonably likely that current inactive markets will continue as a result of a variety of external factors, including but not limited to economic conditions.

The Company’s level 3 securities available for sale include instruments totaling approximately $1.4 billion at March 31, 2009 including FHLB and Federal Reserve Bank stock, as well as certain municipal bond securities, some of which are only redeemable with the issuer at par and cannot be traded in the market. As such, no significant observable market data for these instruments is available. These nonmarketable securities total approximately $844.1 million at March 31, 2009. Level 3 trading assets total approximately $1.4 billion at March 31, 2009, which includes the Coke forward sale derivative valued at approximately $259.5 million at March 31, 2009, as well as approximately $619.2 million of Small Business Administration (“SBA”) loans and pooled securities whose payment is guaranteed by the U.S. government. The remaining level 3 securities, both trading assets and available for sale securities are predominantly interests retained from Company-sponsored securitizations of residential mortgage loans, investments in structured investment vehicles (“SIVs”), and MBS and ABS collateralized by a variety of underlying assets including residential mortgages, corporate obligations, and commercial real estate for which little or no market activity exists or whose value of the underlying collateral is not market observable. The Company has also increased its exposure to bank trust preferred ABS, student loan ABS, and municipal securities as a result of its offer to purchase certain ARS as a result of failed auctions.

ARS purchased since the auction rate market began failing in February 2008 have all been considered level 3 securities. The Company classifies ARS as securities available for sale or trading securities. Under a functioning ARS market, ARS could be remarketed with interest rate caps to investors targeting short-term investment securities that repriced generally every 7 to 28 days. Unlike other short-term instruments, these ARS do not benefit from back-up liquidity lines or letters of credit, and, therefore, as auctions began to fail, investors were left with securities that were more akin to longer-term, 20-30 year, illiquid bonds. The combination of materially increased tenors, capped interest rates and general market illiquidity has had a significant impact on the risk profiles and market values of these securities and has resulted in the use of valuation techniques and models that rely on significant inputs that are largely unobservable.

Investments in various ABS such as residual and other retained interests from securitizations, SIVs and MBS, which are classified as securities available for sale or trading securities, are valued based on internal models that incorporate assumptions, such as prepayment speeds and estimated credit losses, which are not observable in the current markets. Generally, the Company attempts to obtain pricing for its securities from a third party pricing provider or third party brokers who have experience in valuing certain investments. This pricing may be used as either direct support for the Company’s valuation or used to validate

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

outputs from its own proprietary models. Although third party price indications have been available for the majority of the securities, limited trading activity makes it difficult to support the observability of these quotations. Therefore, the Company evaluates third party pricing to determine the reasonableness of the information relative to changes in market data based on trades it executed during the quarter, market information received from outside market participants and analysts, or changes in the underlying collateral performance. When third party pricing is not available to corroborate pricing information received, the Company will use industry standard or proprietary models to estimate fair value, and will consider assumptions such as relevant market indices that correlate to the underlying collateral, prepayment speeds, default rates, loss severity rates, and discount rates.

As disclosed in the tabular level 3 rollforwards, during the three months ended March 31, 2009, the Company transferred certain available for sale securities into level 3 due to the illiquidity of these securities and lack of market observable information to value these securities. Transfers into level 3 consists of municipal bonds for which no trading market exists The transfers into level 3 were not the result of using an alternative valuation approach to estimate fair value that otherwise would have impacted earnings. Transfers into level 3 are generally assumed to be as of the beginning of the quarter in which the transfer occurred while transfers out of level 3 are generally assumed to occur as of the end of the quarter in which the transfer occurred.

Level 3 loans are primarily non-agency residential mortgage loans held for investment or loans held for sale for which there is little to no observable trading activity of similar instruments in either the new issuance or secondary loan markets as either whole loans or as securities. Prior to the non-agency residential loan market disruption, which began during the third quarter of 2007 and continues, the Company was able to obtain certain observable pricing from either the new issuance or secondary loan market. However, as the markets deteriorated and certain loans were not actively trading as either whole loans or as securities, the Company began employing alternative valuation methodologies to determine the fair value of the loans. Even if limited market data is available, the characteristics of the underlying loan collateral are critical to arriving at an appropriate fair value in the current markets, such that any similarities that may otherwise be drawn are questionable. The alternative valuation methodologies include modeling of the underlying cash flows based on relevant market factors, such as prepayment spreads, default rates and loss sensitivity. Additional liquidity adjustments were recorded, when necessary to accurately reflect the price the Company believes it would receive if the loans were sold in current market conditions.

Additionally, level 3 loans include some of the loans acquired through the acquisition of GB&T. The loans the Company elected to account for at fair value are primarily nonperforming commercial real estate loans, which do not trade in an active secondary market. As these loans are classified as nonperforming, 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 internal estimates, incorporating market data when available, of the value of the underlying collateral.

The publicly-issued, fixed rate debt that the Company has elected to carry at fair value is valued by obtaining quotes from a third party pricing service and utilizing broker quotes and limited institutional trading data to corroborate the reasonableness of those marks. During the latter half of 2008, there were few trades to reference, although trading in the Company’s principal market has increased slightly in the first quarter of 2009. Although the Company has not made any significant adjustments to the third party pricing received, given the continued decline in liquidity for these types of instruments, both in the secondary markets and for primary issuances, this debt was transferred from a level 2 to a level 3 classification during 2008. The transfer into level 3 was not the result of using an alternative valuation approach to estimate fair value that otherwise would have impacted earnings.

Beginning in the first quarter of 2008, the Company classified IRLCs on residential mortgage loans held for sale, which are derivatives under SFAS No. 133, on a gross basis within other liabilities or other assets. The fair value of these commitments, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. These “pull-through” rates are based on the Company’s historical data and reflect the Company’s best estimate of the likelihood that a commitment will ultimately result in a closed loan. As a result of the adoption of Staff Accounting Bulletin (“SAB”) No. 109, beginning in the first quarter of 2008, servicing value was also included in the fair value of IRLCs.

The Company records MSRs at fair value on both a recurring and non-recurring basis. The fair value of MSRs is determined by projecting cash flows which are then discounted to estimate an expected fair value. The fair value of MSRs is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, and underlying portfolio characteristics. The underlying assumptions and estimated values are corroborated by values received from independent third parties based on their review of the servicing portfolio. Because these inputs are not transparent in market trades, MSRs are considered to be level 3 assets in the valuation hierarchy.

 

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Most derivative instruments (see Note 10 “Derivative Financial Instruments”) are level 1 or level 2 instruments, except for the IRLCs discussed herein. In addition, the equity forward agreements (the “Agreements”) the Company entered into related to its Coke stock are level 3 instruments, due to the unobservability of a significant assumption used to value these instruments. Because the value is primarily driven by the embedded equity collars on the Coke shares, a Black-Scholes model is the appropriate valuation model. Most of the assumptions are directly observable from the market, such as the per share market price of Coke, interest rates, and the dividend rate on Coke. Volatility is a significant assumption and is impacted both by the unusually large size of the trade and the long tenor until settlement. Because the derivatives carry initial terms of approximately six and a half and seven years and are on a significant number of Coke shares, the observable and active options market on Coke does not provide for any identical or similar instruments. As such, the Company receives estimated market values from a market participant who is knowledgeable about Coke equity derivatives and is active in the market. Based on inquiries of the market participant as to their procedures, as well as the Company’s own valuation assessment procedures, the Company has satisfied itself that the market participant is using methodologies and assumptions that other market participants would use in arriving at the fair value of the Agreements. At March 31, 2009 and December 31, 2008, the Agreements’ fair value represented an asset position for the Company of approximately $259.5 million and $249.5 million, respectively.

Certain level 3 assets include non-financial assets such as affordable housing properties, private equity investments, and intangible assets that are measured on a non-recurring basis based on third party price indications or the estimated expected remaining cash flows to be received from these assets discounted at a market rate that is commensurate with their risk profile.

Credit Risk

The credit risk associated with the underlying cash flows of an instrument carried at fair value was a consideration in estimating the fair value of certain financial instruments. Credit risk was considered in the valuation through a variety of inputs, as applicable, including, the actual default and loss severity of the collateral, the instrument’s spread in relation to U.S. Treasury rates, the capital structure of the security and level of subordination, or the rating on a security/obligor as defined by nationally recognized rating agencies. The assumptions used to estimate credit risk applied relevant information that a market participant would likely use in valuing an instrument.

For loan products that the Company has elected to carry at fair value, the Company has considered the component of the fair value changes due to instrument-specific credit risk, which is intended to be an approximation of the fair value change attributable to changes in borrower-specific credit risk. For the three months ended March 31, 2009, SunTrust recognized a loss on loans accounted for at fair value of approximately $8.8 million due to changes in fair value attributable to borrower-specific credit risk. As of March 31, 2008, approximately $61.6 million, or 1.2%, of the total mortgage loans carried at fair were on nonaccrual status, past due, or had other characteristics that would be attributable to instrument-specific credit risk. The Company, therefore, did not ascribe significant fair value changes to instrument-specific credit risk during the three months ended March 31, 2008. In addition to borrower-specific credit risk, there are other, more significant variables that will drive changes in the fair value of the loans, including interest rates changes and general conditions in the principal markets for the loans.

For the publicly-traded fixed rate debt carried at fair value, the Company estimated credit spreads above U.S. Treasury rates, based on credit spreads from actual or estimated trading levels of the debt. Prior to the second quarter of 2008, the Company had estimated the impacts of its own credit spreads over LIBOR; however, given the volatility in the interest rate markets around that time, the Company analyzed the difference between using U.S. Treasury rates and LIBOR. While the historical analysis indicated only minor differences, the Company believed that beginning in the second quarter of 2008 a more accurate depiction of the impacts of changes in its own credit spreads is to base such estimation on the U.S. Treasury rate, which reflects a risk-free interest rate. Further supporting this decision, LIBOR has exhibited extreme volatility and remained at elevated levels due to the global credit crisis. A reason the Company had selected LIBOR in the past was due to the presence of LIBOR-based interest rate swap contracts that the Company had historically used to hedge its interest rate exposure on these debt instruments under SFAS No. 133. The Company may, however, also purchase fixed rate trading securities in an effort to hedge its fair value exposure to its fixed rate debt. The Company may also continue to use interest rate swap contracts to hedge interest exposure on future fixed rate debt issuances pursuant to the provisions of SFAS No. 133. Based on U.S. Treasury rates, the Company recognized a gain of approximately $104.0 million for the three months ended March 31, 2009, and a gain of approximately $231.3 million, for the three months ended March 31, 2008, due to changes in its own credit spread on its public debt as well as its brokered deposits.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

The following tables present assets and liabilities measured at fair value on a recurring basis and the change in fair value for those specific financial instruments in which fair value has been elected. The tables do not reflect the change in fair value attributable to the related economic hedges the Company used to mitigate the interest rate risk associated with the financial instruments. The changes in the fair value of economic hedges were also recorded in trading account profits and commissions or mortgage production related 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 Measurements at
March 31, 2009,
Using
(Dollars in thousands)          Assets/Liabilities          Quoted
Prices In
Active
Markets
for
Identical
Assets/Liabilities
(Level 1)
   Significant
Other
      Observable      
Inputs
(Level 2)
   Significant
      Unobservable      
Inputs

(Level 3)

Assets

           

 

Trading assets

   $7,397,338      $187,823      $5,833,293      $1,376,222  

 

Securities available for sale

   19,485,406      1,456,772      16,644,889      1,383,745  

 

Loans held for sale

   5,224,353      -      4,771,463      452,890  

 

Loans

   242,193      -      -      242,193  

Other intangible assets 2

   308,296      -      -      308,296  

Other assets 1

   251,774      625      144,450      106,699  

Liabilities

           

 

Brokered deposits

   583,976      -      583,976      -  

 

Trading liabilities

   3,050,628      465,786      2,584,842      -  

 

Long-term debt

   3,352,400      -      -      3,352,400  

 

Other liabilities 1

   111,799      -      111,327      472  

1 This amount includes IRLCs and derivative financial instruments entered into by the Household Lending line of business to hedge its interest rate risk.

2 This amount includes MSRs carried at fair value.

 

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          Fair Value Measurements at
December 31, 2008,
Using
(Dollars in thousands)          Assets/Liabilities          Quoted
Prices In
Active
Markets
for
Identical
Assets/Liabilities
(Level 1)
   Significant
Other
      Observable      
Inputs
(Level 2)
   Significant
      Unobservable      
Inputs

(Level 3)

Assets

           

 

Trading assets

   $10,396,269      $149,321      $8,855,563      $1,391,385  

 

Securities available for sale

   19,696,537      1,485,364      16,721,569      1,489,604  

 

Loans held for sale

   2,424,432      -      1,936,987      487,445  

 

Loans

   270,342      -      -      270,342  

Other assets 1

   109,600      775      35,231      73,594  

Liabilities

           

 

Brokered deposits

   587,486      -      587,486      -  

 

Trading liabilities

   3,240,784      440,436      2,800,348      -  

 

Other short-term borrowings

   399,611      -      399,611      -  

 

Long-term debt

   7,155,684      -      3,659,423      3,496,261  

Other liabilities 1

   72,911      -      71,738      1,173  

1 This amount includes IRLCs and derivative financial instruments entered into by the Household Lending line of business to hedge its interest rate risk.

 

     Fair Value Gain/(Loss) for the Three Months Ended
March 31, 2009, for Items Measured at Fair Value Pursuant

to Election of the Fair Value Option
  Fair Value Gain/(Loss) for the Three Months Ended
March 31, 2008, for Items Measured at Fair Value Pursuant

to Election of the Fair Value Option
(Dollars in thousands)    Trading Account
Profits and
Commissions
   Mortgage
    Production    
Related

Income 2
       Mortgage    
Servicing
Related
Income
   Total
    Changes in    
Fair Values
Included in
Current-

Period
Earnings1
  Trading Account
Profits and
Commissions
  Mortgage
Production
Related

Income
    Total
    Changes in    
Fair Values
Included in
Current-

Period
Earnings1

Assets

                   

Trading assets

   ($155)     $-        $-        ($155)   ($3,558)    $-         ($3,558) 

 

Loans held for sale

   -      287,198      -      287,198   -     73,099   2   73,099  

 

Loans

   1,859      (5,129)     -      (3,270)   -     (9,084)      (9,084) 

Other intangible assets

   -      4,572      (25,798)     (21,226)   -     -       -  
 

Liabilities

                   

Brokered deposits

   17,452      -      -      17,452    (3,590)    -       (3,590) 

 

Long-term debt

   168,666      -      -      168,666    (13,549)    -       (13,549) 

1 Changes in fair value for the three month periods ended March 31, 2009 and 2008, exclude accrued interest for the periods then ended. Interest income or interest expense on trading assets, loans, loans held for sale, brokered deposits and long-term debt that have been elected to be carried at fair value under the provisions of SFAS No. 159 or SFAS No. 155 are recorded in interest income or interest expense in the Consolidated Statements of Income based on their contractual coupons. Certain trading assets do not have a contractually stated coupon and, for these securities, the Company records interest income based on the effective yield calculated upon acquisition of those securities.

2 For the periods ended March 31, 2009 and 2008, income related to Loans Held for Sale, net includes $141.7 million and $121.5 million, respectively, related to MSRs recognized upon the sale of loans reported at fair value. For the period ended March 31, 2009, income related to other intangible assets includes $4.6 million of MSRs recognized upon the sale of loans reported at the lower of cost or market value. These MSRs are included in the table since the Company elected to report MSRs recognized in 2009 using the fair value method. Previously, MSRs were reported under the amortized cost method.

The following table presents the change in carrying value of those assets measured at fair value on a non-recurring basis, for which impairment was recognized in the current period. The table does not reflect the change in fair value attributable to any related economic hedges the Company may have used to mitigate the interest rate risk associated with loans held for sale and MSRs, nor does

 

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it include information related to the goodwill impairment charge recorded during the three months ended March 31, 2009 which is discussed in Note 5, “Goodwill and Other Intangible Assets”, to the Consolidated Financial Statements. The Company’s economic hedging activities for loans held for sale are deployed at the portfolio level.

 

          Fair Value Measurement at
March 31, 2009,
Using
    
(Dollars in thousands)    Net
      Carrying      
Value
   Quoted
Prices In
Active
Markets
for
Identical
  Assets/Liabilities  
(Level 1)
   Significant
Other
      Observable      
Inputs

(Level 2)
   Significant
    Unobservable    
Inputs

(Level 3)
   Valuation
      Allowance      

Loans Held for Sale 1

   $1,028,702      -    $881,368      $147,334      ($64,990) 

MSRs 2

   515,041      -    -      515,041      (174,580) 

OREO 3

   593,579      -    593,579      -      (73,944) 

Loans 4

   145,355      -    145,355      -      (21,199) 

Other Assets 5

   93,887      -    -      93,887      -  

1These balances are measured at the lower of cost or market in accordance with SFAS No. 65 and SOP 01-6.

2 These balances are measured at fair value on a non-recurring basis in accordance with SFAS No. 140, as amended. MSRs are stratified for the purpose of impairment testing with impaired amounts presented herein.

3 These balances are measured at fair value on a non-recurring basis in accordance with SFAS No. 144.

4 These balances are measured at fair value on a non-recurring basis using the fair value of the underlying collateral as described in SFAS No. 114 and were impacted by a $21.2 million impairment charge recorded during the period ended March 31, 2009.

5 These balances are measured at fair value on a non-recurring basis in accordance with APB No. 18 and were impacted by a $12.7 million impairment charge recorded during the period ended March 31, 2009.

 

          Fair Value Measurement at
December 31, 2008,
Using
    
(Dollars in thousands)    Net
      Carrying      
Value
   Quoted
Prices In
Active
Markets
for
Identical
  Assets/Liabilities  
(Level 1)
   Significant
Other
      Observable      
Inputs

(Level 2)
   Significant
    Unobservable    
Inputs

(Level 3)
   Valuation
      Allowance        

Loans Held for Sale 1

   $839,758      -    $738,068      $101,690      ($68,154) 

MSRs 2

   794,783      -    -      794,783      (370,000) 

OREO 3

   500,481      -    500,481      -      (54,450) 

Affordable Housing 3

   471,156      -    -      471,156      -  

Loans 4

   178,692      -    178,692      -      (34,105) 

Other Assets 5

   45,724      -    -      45,724      -  

Other Intangible Assets 6

   17,298      -    -      17,298      -  

1 These balances are measured at the lower of cost or market in accordance with SFAS No. 65 and SOP 01-6.

2 These balances are measured at fair value on a non-recurring basis in accordance with SFAS No. 140, as amended. MSRs are stratified for the purpose of impairment testing with impaired amounts presented herein.

3 These balances are measured at fair value on a non-recurring basis in accordance with SFAS No. 144. Affordable housing was impacted by a $19.9 million impairment charge recorded during the year ended December 31, 2008.

4 These balances are measured at fair value on a non-recurring basis using the fair value of the underlying collateral as described in SFAS No. 114 and were impacted by a $34.1 million impairment charge recorded during the year ended December 31, 2008.

5 These balances are measured at fair value on a non-recurring basis in accordance with APB No. 18 and were impacted by a $27.2 million impairment charge recorded during the year ended December 31, 2008.

6 These balances are measured at fair value on a non-recurring basis in accordance with SFAS No. 142 and SFAS No. 144 and were impacted by a $45.0 million impairment charge recorded during the second quarter of 2008.

 

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As of March 31, 2009 and December 31, 2008, $43.8 million and $48.5 million, respectively, of leases held for sale were included in loans held for sale in the Consolidated Balance Sheets and were not eligible for fair value election under SFAS No. 159.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets and liabilities measured on a recurring basis using significant unobservable inputs (other than MSRs which are disclosed in Note 5, “Goodwill and Other Intangible Assets”, to the Consolidated Financial Statements):

 

     Fair Value Measurements
Using Significant Unobservable Inputs
 
(Dollars in thousands)          Trading      
Assets
            Securities        
Available

for Sale
    Loans
Held
  for Sale  
    Loans         Long-term    
Debt
 

Beginning balance January 1, 2009

   $1,391,385       $1,489,604       $487,445       $270,342       ($3,496,261)   

  Total gains/(losses) (realized/unrealized):

          

     Included in earnings

   (39,224)  1, 5   4,774   2, 5   (4,125)  3   (3,270)  4   143,861   1

     Included in other comprehensive income

   9,982   6   (28,269)      -       -       -    

  Purchases and issuances

   130,001       129,083       -       22       -    

  Settlements

   -       (150,842)      -       -       -    

  Sales

   (78,602)      -       (8,310)      -       -    

  Paydowns and maturities

   (37,320)      (63,741)      (27,021)      (14,932)      -    

  Loan foreclosures transferred to other real estate owned

   -       -       (1,099)      (9,969)      -    

Level 3 transfers, net

   -       3,136       6,000       -       -    
                              

Ending balance March 31, 2009

       $1,376,222           $1,383,745         $452,890         $242,193         ($3,352,400)  
                              

The amount of total gains/(losses) for the three months ended March 31,

2009 included in earnings attributable to the change in unrealized gains or

losses relating to assets still held at March 31, 2009

   ($18,891)  1   $-   2   ($8,712)  3   ($6,292)  4   $143,861  1
                              

1 Amounts included in earnings are recorded in trading account profits and commissions.

2 Amounts included in earnings are recorded in net securities gains/(losses).

3 Amounts included in earnings are recorded in mortgage production related income.

4 Amounts are generally included in mortgage production income except $1.9 million in the three month period ended March 31, 2009, related to loans acquired in the GB&T acquisition. The mark on the loans is included in trading account profits and commissions.

5 Amounts included in earnings do not include losses accrued as a result of the auction rate securities settlement discussed in Note 14, “Contingencies,” to the Consolidated Financial Statements.

6 Amount recorded in other comprehensive income is the effective portion of the cash flow hedges related to the Company’s forward sale of its shares of the Coca-Cola Company stock as discussed in Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements.

 

     Fair Value Measurements
Using Significant Unobservable Inputs
 
(Dollars in thousands)          Trading      
Assets
    Securities
        Available        

for Sale
      Mortgage Loans  
Held

for Sale
        Loans      

Beginning balance January 1, 2008

   $ 2,950,145     $ 869,707     $ 481,327     $ 220,784  

  Total gains/(losses) (realized/unrealized):

        

     Included in earnings

     (248,516 1     (64,075 2     (13,797 3     (9,399 3

     Included in other comprehensive income

     -       32,105       -       -  

  Purchases and issuances

     43,950       -       -       -  

  Sales

     (524,083 )     -       -       -  

  Paydowns and maturities

     (497,701 )     (45,177 )     (31,795 )     (8,531 )

  Transfers from loans held for sale to loans held in portfolio

     -       -       (79,906 )     79,906  

  Transfers into Level 3, net

     26,795       397,546       158,024       -  
                                

Ending balance March 31, 2008

   $ 1,750,590     $ 1,190,106     $ 513,853     $ 282,760  
                                

The amount of total gains/(losses) for the period included in

earnings attributable to the change in unrealized gains or losses

relating to assets and liabilities still held at March 31, 2008

     ($201,651 ) 1     ($64,075 2     ($13,797 ) 3     ($9,399 ) 3
                                

1 Amounts included in earnings are recorded in trading account profits and commissions.

2 Amounts included in earnings are recorded in net securities gains/(losses).

3 Amounts included in earnings are recorded in mortgage production related income.

The following tables show a reconciliation of the beginning and ending balances for fair valued other assets/(liabilities), which are IRLCs on residential mortgage loans held for sale, measured using significant unobservable inputs:

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

(Dollars in thousands)    Other Assets/
  (Liabilities), net  

Beginning balance January 1, 2009

   $72,421  

Included in earnings: 1

  

Issuances (inception value)

   403,071  

Fair value changes

   (21,345) 

Expirations

   (104,104) 

Settlements of IRLCs and transfers into closed loans

   (243,816) 
    

Ending balance March 31, 2009 2

   $106,227  
    

1 Amounts included in earnings are recorded in mortgage production related income.

2 The amount of total gains/(losses) for the period included in earnings attributable to the

change in unrealized gains or losses relating to IRLCs still held at March 31, 2009.

 

(Dollars in thousands)    Other Assets/
  (Liabilities), net  

 

Beginning balance January 1, 2008

   ($19,603) 

Included in earnings:1

  

Issuances (inception value)

   123,948  

Fair value changes

   (27,780)  

Expirations

   (26,151) 

Settlements of IRLCs and transfers into closed loans

   (24,064) 
    

Ending balance March 31, 20082

   $26,350  
    

1 Amounts included in earnings are recorded in mortgage production related income.

2 The amount of total gains/(losses) for the period included in earnings attributable to the change in unrealized

gains or losses relating to IRLCs still held at March 31, 2008.

The following tables present the difference between the aggregate fair value and the aggregate unpaid principal balance of trading assets, loans, loans held for sale, brokered deposits and long-term debt instruments for which the fair value option has been elected. For loans and loans held for sale for which the fair value option has been elected, the tables also include the difference between aggregate fair value and the aggregate unpaid principal balance of loans that are 90 days or more past due, as well as loans in nonaccrual status.

 

(Dollars in thousands)   Aggregate
Fair Value
    March 31, 2009    
  Aggregate
Unpaid Principal
    Balance under FVO    
March 31, 2009
  Fair value
over/(under)
    unpaid principal    

Trading assets

  $486,187     $487,166     ($979) 

Loans

  198,684     224,306     (25,622) 

Past due loans of 90 days or more

  4,595     6,707     (2,112) 

Nonaccrual loans

  38,914     67,029     (28,115) 

Loans held for sale

  5,185,820     5,146,374     39,446  

Past due loans of 90 days or more

  4,558     6,916     (2,358) 

Nonaccrual loans

  33,975     58,517     (24,542) 

Brokered deposits

  583,976     635,019     (51,043) 

Long-term debt

  3,352,400     3,613,085     (260,685) 

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

(Dollars in thousands)   Aggregate
Fair Value
    December 31, 2008    
  Aggregate
Unpaid Principal
    Balance under FVO    
December 31, 2008
  Fair value
over/(under)
    unpaid principal    

Trading assets

  $852,300     $861,239     ($8,939) 

Loans

  222,221     247,098     (24,877) 

Past due loans of 90 days or more

  2,018     2,906     (888) 

Nonaccrual loans

  46,103     81,618     (35,515) 

Loans held for sale

  2,392,286     2,408,392     (16,106) 

Past due loans of 90 days or more

  4,663     7,222     (2,559) 

Nonaccrual loans

  27,483     47,228     (19,745) 

Brokered deposits

  587,486     627,737     (40,251) 

Long-term debt

  7,155,684     6,963,085     192,599  

Note 14 – Contingencies

The Company and its subsidiaries are parties to numerous claims and lawsuits arising in the course of their normal business activities, some of which involve claims for substantial amounts. The Company’s experience has shown that the damages often alleged by plaintiffs or claimants are grossly overstated, unsubstantiated by legal theory, and bear no relation to the ultimate award that a court might grant. In addition, valid legal defenses, such as statutes of limitations, frequently result in judicial findings of no liability by the Company. Because of these factors, the Company cannot provide a meaningful estimate of the range of reasonably possible outcomes of claims in the aggregate or by individual claim. However, it is the opinion of management that liabilities arising from these claims in excess of the amounts currently accrued, if any, will not have a material impact to the Company’s financial condition or results of operations.

In September 2008, STRH and STIS entered into an “agreement in principle” with the Financial Industry Regulatory Authority (“FINRA”) related to the sales and brokering of ARS by STRH and STIS regardless whether any claims have been asserted by the investor. This agreement is non-binding and is subject to the negotiation of a final settlement. At this time there is no final settlement with FINRA, and FINRA has resumed its investigation. Notwithstanding that fact, the Company announced in November 2008 that it would move forward with ARS purchases from essentially the same categories of investors who would have been covered by the original term sheet with FINRA. Additionally, the Company has elected to purchase ARS from certain other investors not addressed by the agreement. The total par amount of ARS the Company has purchased as of March 31, 2009 is approximately $729 million. As of March 31, 2009, the Company has repurchased approximately 72% of the securities it intends to repurchase. The fair value of ARS purchased pursuant to the pending settlement is approximately $206.1 million and $133.1 million in trading securities and $142.1 million and $48.2 million in available for sale securities, at March 31, 2009 and December 31, 2008, respectively. The Company has reserved for the remaining probable loss pursuant to the provisions of SFAS No. 5 that could be reasonably estimated to be approximately $52.2 million and $99.4 million at March 31, 2009 and December 31, 2008, respectively. The remaining loss amount represents the difference between the par amount and the estimated fair value of the remaining ARS that the Company believes it will likely purchase from investors. This amount may change by the movement in fair market value of the underlying investment and therefore, can be impacted by changes in the performances of the underlying obligor or collateral as well as general market conditions. The total gain relating to the ARS agreements recognized during the quarter ended March 31, 2009 was approximately $4.2 million, compared to a loss recognized during the year ended December 31, 2008 of $177.3 million. These amounts are comprised of trading gains or losses on probable future purchases, trading losses on ARS classified as trading securities that were purchased from investors, securities gains on calls and redemptions of available for sale securities that were purchased from investors, and estimated fines levied against STRH and STIS by various federal and state agencies. Due to the pass-through nature of these security purchases, the economic loss has been included in the Corporate Other and Treasury segment.

Note 15 – Business Segment Reporting

The Company has four business segments used to measure business activities: Retail and Commercial, Corporate and Investment Banking, Household Lending, and Wealth and Investment Management with the remainder in Corporate Other and Treasury. Beginning in 2009, the segment reporting structure was adjusted in the following ways:

 

  1.

The management of Consumer Lending was combined with Mortgage to create Household Lending. Consumer Lending, which includes student lending, indirect auto, and other specialty consumer lending units, was previously a part of Retail and Commercial. This change will enable the Company to provide a strategic framework for all consumer lending products and will also create operational efficiencies.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

  2.

Commercial Real Estate is now a part of Retail and Commercial as Commercial and Commercial Real Estate clients have similar needs due to their comparable size and because the management structure is geographically based. Previously, Commercial Real Estate was combined with Corporate and Investment Banking in Wholesale Banking.

Retail and Commercial Banking serves consumers, businesses with up to $100 million in annual revenue, government/not-for-profit enterprises, and includes Commercial Real Estate which serves commercial and residential developers and investors. This business segment also provides services for the clients of our other businesses. Clients are serviced through an extensive network of traditional and in-store branches, ATMs, the internet and the telephone.

Corporate and Investment Banking serves clients in the large and middle corporate markets. The Corporate Banking Group generally serves clients with greater than $750 million in annual revenue and is focused on selected industry sectors: consumer and retail, diversified, energy, financial services and technology and healthcare. The Middle Market Group generally serves clients with annual revenue ranging from $100 million to $750 million and is more geographically focused. Through SunTrust Robinson Humphrey, Corporate and Investment Banking provides an extensive range of investment banking products and services to its clients, including strategic advice, capital raising, and financial risk management. These investment banking products and services are also provided to Commercial and Wealth & Investment Management clients. In addition, Corporate and Investment Banking offers traditional lending, leasing, treasury management services and institutional investment management to its clients.

Household Lending offers residential mortgages, home equity lines and loans, indirect auto, student, bank card and other consumer loan products. Loans are originated through the Company’s extensive network of traditional and in-store retail branches, via the internet (www.suntrust.com), and by phone (1-800-SUNTRUST). Residential mortgage loans are also originated nationally through the Company’s wholesale and correspondent channels. These products are either sold in the secondary market – primarily with servicing rights retained – or held in the Company’s loan portfolio. The line of business services loans for itself, for other SunTrust lines of business, and for other investors, and operates a tax service subsidiary (ValuTree Real Estate Services, LLC).

Wealth and Investment Management provides a full array of wealth management products and professional services to both individual and institutional clients. Wealth and Investment Management’s primary businesses include Private Wealth Management (“PWM”) (brokerage and individual wealth management), GenSpring Family Offices LLC (“GenSpring”), Institutional Investment Solutions (“IIS”), and RidgeWorth Capital Management (“RidgeWorth”).

In addition, the Company reports Corporate Other and Treasury, which includes the 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. Other components include Enterprise Information Services, which is the primary data processing and operations group; the Corporate Real Estate group, Marketing, SunTrust Online, Human Resources, Finance, Corporate Risk Management, Legal and Compliance, Branch Operations, Corporate Strategies, Procurement, and Executive Management. Finally, Corporate Other and Treasury also includes Trustee Management, which provides treasury management and deposit services to bankruptcy trustees.

Because the business segment results are presented based on management accounting practices, the transition to the consolidated results, which are prepared under U.S. GAAP, creates certain differences which are reflected in Reconciling Items.

For business segment reporting purposes, the basis of presentation in the accompanying discussion includes the following:

 

   

Net interest income – All net interest income is presented on a fully taxable-equivalent basis. The revenue gross-up has been applied to tax-exempt loans and investments to make them comparable to other taxable products. The segments have also been matched maturity funds transfer priced, generating credits or charges based on the economic value or cost created by the assets and liabilities of each segment. The mismatch between funds credits and funds charges at the segment level resides in Reconciling Items. The change in the matched maturity funds mismatch is generally attributable to the corporate balance sheet management strategies.

 

   

Provision for loan losses - Represents net charge-offs by segment. The difference between the segment net charge-offs and the consolidated provision for loan losses is reported in Reconciling Items.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

   

Provision for income taxes - Calculated using a nominal income tax rate for each segment. This calculation includes the impact of various income adjustments, such as the reversal of the fully taxable-equivalent gross up on tax-exempt assets, tax adjustments, and credits that are unique to each business segment. The difference between the calculated provision for income taxes at the segment level and the consolidated provision for income taxes is reported in Reconciling Items.

The Company continues to augment its internal management reporting methodologies. Currently, the segment’s financial performance is comprised of direct financial results as well as various allocations that for internal management reporting purposes provide an enhanced view of analyzing the segment’s financial performance. The internal allocations include the following:

 

   

Operational Costs – Expenses are charged to the segments based on various statistical volumes multiplied by activity based cost rates. As a result of the activity based costing process, planned residual expenses are also allocated to the segments. The recoveries for the majority of these costs are in the Corporate Other and Treasury segment.

 

   

Support and Overhead Costs – Expenses not directly attributable to a specific segment are allocated based on various drivers (e.g., number of full-time equivalent employees and volume of loans and deposits). The recoveries for these allocations are in Corporate Other and Treasury.

 

   

Sales and Referral Credits – Segments may compensate another segment for referring or selling certain products. The majority of the revenue resides in the segment where the product is ultimately managed.

The application and development of management reporting methodologies is a dynamic process and is subject to 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. Whenever significant changes to management reporting methodologies take place, the impact of these changes is quantified and prior period information is reclassified wherever practicable.

 

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Notes to Consolidated Financial Statements (Unaudited)-Continued

 

    Three Months Ended March 31, 2009
(Dollars in thousands)   Retail and
Commercial
  Corporate and
Investment
Banking
  Household
Lending
  Wealth and
Investment
Management
  Corporate Other
and Treasury
      Reconciling    
Items
  Consolidated

Average total assets

      $58,164,316         $34,796,955         $52,482,628         $8,909,689         $23,800,448         $717,249         $178,871,285  

Average total liabilities

  89,221,391     15,225,462     3,793,851     10,366,831     38,095,264     (199,421)    156,503,378  

Average total equity

  -     -     -     -     -     22,367,907     22,367,907