SUNTRUST BANKS INC, 10-Q filed on 8/10/2009
Quarterly Report
Statement Of Income Interest Based Revenue (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
Interest Income
 
 
 
 
Interest and fees on loans
$ 1,397,045 
$ 2,809,930 
$ 1,715,410 
$ 3,570,056 
Interest and fees on loans held for sale
72,406 
134,238 
72,491 
171,500 
Interest and dividends on securities available for sale
 
 
 
 
Taxable interest
168,659 
349,861 
156,614 
309,517 
Tax-exempt interest
10,018 
20,717 
11,240 
22,543 
Dividends
18,066 1
36,228 1
29,337 1
63,262 1
Interest on funds sold and securities purchased under agreements to resell
558 
1,495 
6,734 
15,681 
Interest on deposits in other banks
63 
176 
201 
448 
Trading account interest
26,459 
69,964 
74,338 
171,690 
Total interest income
1,693,274 
3,422,609 
2,066,365 
4,324,697 
Interest Expense
 
 
 
 
Interest on deposits
398,903 
822,776 
579,829 
1,327,649 
Interest on funds purchased and securities sold under agreements to repurchase
2,441 
5,174 
35,378 
92,327 
Interest on trading liabilities
4,917 
11,077 
6,583 
12,633 
Interest on other short-term borrowings
3,593 
8,748 
13,088 
35,864 
Interest on long-term debt
193,763 
423,079 
274,771 
559,641 
Total interest expense
603,617 
1,270,854 
909,649 
2,028,114 
Net interest income
1,089,657 
2,151,755 
1,156,716 
2,296,583 
Provision for loan losses
962,181 
1,956,279 
448,027 
1,008,049 
Net interest income after provision for loan losses
127,476 
195,476 
708,689 
1,288,534 
Noninterest Income
 
 
 
 
Service charges on deposit accounts
210,224 
416,618 
230,296 
442,135 
Trust and investment management income
117,007 
233,017 
157,319 
318,421 
Other charges and fees
127,799 
252,120 
129,581 
256,812 
Card fees
80,505 
156,165 
78,566 
152,327 
Retail investment services
55,400 
112,113 
73,764 
146,064 
Investment banking income
77,038 
136,572 
60,987 
116,407 
Mortgage production related income
165,388 
415,858 
63,508 
149,057 
Mortgage servicing related income
139,658 
223,010 
32,548 
61,646 
Trading account profits/(losses) and commissions
(30,020)
77,273 
(49,306)
(21,088)
Net gain on sale of businesses
29,648 
119,038 
Gain from ownership in Visa
112,102 
112,102 
86,305 
Net gain on sale/leaseback of premises
37,039 
Other noninterest income
41,473 
79,587 
56,312 
117,148 
Net securities gains/(losses)
(24,899)2
(21,522)2
549,787 2
489,201 2
Total noninterest income
1,071,675 
2,192,913 
1,413,010 
2,470,512 
Noninterest Expense
 
 
 
 
Employee compensation
569,228 
1,142,250 
607,558 
1,192,348 
Employee benefits
134,481 
297,511 
104,399 
234,692 
Outside processing and software
145,359 
283,720 
107,205 
216,370 
Operating losses
32,570 
55,191 
44,654 
74,917 
Marketing and customer development
30,264 
64,989 
47,203 
102,906 
Net occupancy expense
87,220 
174,637 
85,483 
171,924 
Equipment expense
43,792 
87,332 
50,991 
103,386 
Mortgage reinsurance
24,581 
94,620 
24,961 
31,972 
Credit and collection services
66,269 
114,187 
33,733 
61,565 
Amortization/impairment of goodwill/intangible assets
13,955 
780,971 
64,735 
85,450 
Other real estate expense
49,036 
93,408 
24,908 
37,129 
Regulatory assessments
148,675 
196,148 
10,921 
15,326 
Net loss on debt extinguishment
38,864 
13,560 
11,723 
Visa litigation
7,000 
7,000 
(39,124)
Other noninterest expense
136,678 
274,471 
168,591 
326,991 
Total noninterest expense
1,527,972 
3,679,995 
1,375,342 
2,627,575 
Income/(loss) before provision/(benefit) for income taxes
(328,821)
(1,291,606)
746,357 
1,131,471 
Provision/(benefit) for income taxes
(148,957)
(299,734)
202,804 
294,452 
Net income/(loss) including income attributable to noncontrolling interest
(179,864)
(991,872)
543,553 
837,019 
Net income attributable to noncontrolling interest
3,596 
6,755 
3,191 
6,102 
Net Income/(loss)
(183,460)
(998,627)
540,362 
830,917 
Net income/(loss) available to common shareholders
(164,428)
(1,039,809)
529,968 
811,523 
Net income/(loss) per average common share
 
 
 
 
Diluted
(0.41)
(2.77)
1.52 
2.33 
Basic
(0.41)
(2.77)
1.52 
2.33 
Dividends declared per common share
0.10 
0.20 
0.77 
1.54 
Average common shares - diluted
399,242 
375,429 
349,783 
348,927 
Average common shares - basic
399,242 
375,429 
348,714 
347,647 
Statement Of Financial Position Unclassified - Deposit Based Operations (USD $)
In Thousands, except Share data
Jun. 30, 2009
Dec. 31, 2008
Assets
 
 
Cash and due from banks
$ 2,434,859 
$ 5,622,789 
Interest-bearing deposits in other banks
24,310 
23,999 
Funds sold and securities purchased under agreements to resell
798,515 
990,614 
Cash and cash equivalents
3,257,684 
6,637,402 
Trading assets
7,739,197 
10,396,269 
Securities available for sale
19,465,291 1
19,696,537 1
Loans held for sale (loans at fair value: $6,604,312 as of June 30, 2009; $2,424,432 as of December 31, 2008)
8,031,114 
4,032,128 
Loans (loans at fair value: $494,669 as of June 30, 2009; $270,342 as of December 31, 2008)
122,816,176 
126,998,443 
Allowance for loan and lease losses
(2,896,000)
(2,350,996)
Net loans
119,920,176 
124,647,447 
Premises and equipment
1,545,990 
1,547,892 
Goodwill
6,314,382 
7,043,503 
Other intangible assets (mortgage servicing rights at fair value: $641,939 as of June 30, 2009; $0 as of December 31, 2008)
1,517,483 
1,035,427 
Customers' acceptance liability
5,276 
5,294 
Other real estate owned
588,922 
500,481 
Unsettled sales of securities available for sale
874,205 
6,386,795 
Other assets
7,475,251 
7,208,786 
Total assets
176,734,971 
189,137,961 
Liabilities and Shareholders' Equity
 
 
Noninterest-bearing consumer and commercial deposits
24,610,303 
21,522,021 
Interest-bearing consumer and commercial deposits
89,136,044 
83,753,686 
Total consumer and commercial deposits
113,746,347 
105,275,707 
Brokered deposits (CDs at fair value: $1,093,017 as of June 30, 2009; $587,486 as of December 31, 2008)
4,519,752 
7,667,167 
Foreign deposits
535,372 
385,510 
Total deposits
118,801,471 
113,328,384 
Funds purchased
3,920,127 
1,120,079 
Securities sold under agreements to repurchase
2,393,434 
3,193,311 
Other short-term borrowings (debt at fair value: $0 as of June 30, 2009; $399,611 as of December 31, 2008)
1,761,711 
5,166,360 
Long-term debt (debt at fair value: $3,365,649 as of June 30, 2009; $7,155,684 as of December 31, 2008)
18,842,460 
26,812,381 
Acceptances outstanding
5,276 
5,294 
Trading liabilities
2,348,851 
3,240,784 
Unsettled purchases of securities available for sale
938,785 
8,898,279 
Other liabilities
4,769,698 
4,872,284 
Total liabilities
153,781,813 
166,637,156 
Preferred stock
4,918,863 
5,221,703 
Common stock, $1.00 par value
514,667 
372,799 
Additional paid in capital
8,540,036 
6,904,644 
Retained earnings
9,271,388 
10,388,984 
Treasury stock, at cost, and other
(1,115,782)
(1,368,450)
Accumulated other comprehensive income, net of tax
823,986 
981,125 
Total shareholders' equity
22,953,158 
22,500,805 
Total liabilities and shareholders' equity
176,734,971 
189,137,961 
Common shares outstanding
498,786,047 
354,515,013 
Common shares authorized
750,000,000 
750,000,000 
Preferred shares outstanding
50,358 
53,500 
Preferred shares authorized
50,000,000 
50,000,000 
Treasury shares of common stock
15,880,548 
18,284,356 
Statement Of Financial Position Unclassified - Deposit Based Operations (Parenthetical) (USD $)
In Thousands, except Per Share data
Jun. 30, 2009
Dec. 31, 2008
Loans held for sale, fair value
$ 6,604,312 
$ 2,424,432 
Loans, fair value
494,669 
270,342 
Other intangible assets, mortgage servicing rights at fair value
641,939 
Brokered deposits, CDs at fair value
1,093,017 
587,486 
Other short-term borrowings, fair value
399,611 
Long-term debt, fair value
3,365,649 
7,155,684 
Common stock, par value
$ 1.00 
$ 1.00 
Statement Of Shareholders Equity And Other Comprehensive Income (USD $)
In Thousands
Preferred Stock
Common Shares Outstanding
Common Stock
Additional Paid in Capital
Retained Earnings
Treasury Stock and Other
Accumulated Other Comprehensive Income
Total
1/1/2008 - 6/30/2008
 
 
 
 
 
 
 
 
Beginning Balance
$ 500,000 
 
$ 370,578 
$ 6,707,293 
$ 10,646,640 
$ (1,661,719)1
$ 1,607,149 
$ 18,169,941 
Beginning Balance
 
348,411 
 
 
 
 
 
 
Net Income/(Loss)
 
 
 
 
830,917 
 
 
830,917 
Other comprehensive income:
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) on securities, net of taxes
 
 
 
 
 
 
(649,700)
(649,700)
Change in unrealized gains (losses) on derivatives, net of taxes
 
 
 
 
 
 
(43,277)
(43,277)
Change related to employee benefit plans
 
 
 
 
 
 
7,763 
7,763 
Total comprehensive income
 
 
 
 
 
 
 
145,703 
Change in noncontrolling interest
 
 
 
 
 
(1,481)
 
(1,481)
Issuance of common stock for GB&T acquisition
 
2,221 
 
 
 
 
 
 
Issuance of common stock for GB&T acquisition
 
 
2,221 
152,292 
 
 
 
154,513 
Common stock dividends, $0.20 per share in 2009 and $1.54 per share in 2008
 
 
 
 
(540,818)
 
 
(540,818)
Series A preferred stock dividends, $2,022 per share in 2009 and Preferred stock dividends, $2,418 per share in 2008
 
 
 
 
(12,089)
 
 
(12,089)
U.S. Treasury preferred stock dividends, $2,504 per share
 
 
 
 
 
 
 
 
Exercise of stock options and stock compensation expense
 
349 
 
 
 
 
 
 
Accretion of discount associated with U.S. Treasury preferred stock
 
 
 
 
 
 
 
 
Issuance of common stock in connection with SCAP capital plan
 
 
 
 
 
 
 
 
Issuance of common stock in connection with SCAP capital plan
 
 
 
 
 
 
 
 
Extinguishment of forward stock purchase contract
 
 
 
 
 
 
 
 
Repurchase of preferred stock
 
 
 
 
 
 
 
 
Exercise of stock options and stock compensation expense
 
 
 
748 
 
28,178 
 
28,926 
Performance and restricted stock activity
 
1,680 
 
 
 
 
 
 
Performance and restricted stock activity
 
 
 
(38,972)
 
38,910 
 
(62)
Amortization of performance and restricted stock compensation
 
 
 
 
 
29,544 
 
29,544 
Issuance of stock for employee benefit plans
 
881 
 
 
 
 
 
 
Issuance of stock for employee benefit plans
 
 
 
(21,928)
 
70,304 
 
48,376 
Adoption of FSP FAS 115-2
 
 
 
 
 
 
 
 
Other activity
 
 
 
502 
 
39 
 
541 
Ending Balance
500,000 
 
372,799 
6,799,935 
10,924,650 
(1,496,225)1
921,935 
18,023,094 
Ending Balance
 
353,542 
 
 
 
 
 
 
1/1/2009 - 6/30/2009
 
 
 
 
 
 
 
 
Beginning Balance
5,221,703 
 
372,799 
6,904,644 
10,388,984 
(1,368,450)1
981,125 
22,500,805 
Beginning Balance
 
354,515 
 
 
 
 
 
 
Net Income/(Loss)
 
 
 
 
(998,627)
 
 
(998,627)
Other comprehensive income:
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) on securities, net of taxes
 
 
 
 
 
 
51,967 
51,967 
Change in unrealized gains (losses) on derivatives, net of taxes
 
 
 
 
 
 
(337,565)
(337,565)
Change related to employee benefit plans
 
 
 
 
 
 
136,174 
136,174 
Total comprehensive income
 
 
 
 
 
 
 
(1,148,051)
Change in noncontrolling interest
 
 
 
 
 
1,839 
 
1,839 
Issuance of common stock for GB&T acquisition
 
 
 
 
 
 
 
 
Issuance of common stock for GB&T acquisition
 
 
 
 
 
 
 
 
Common stock dividends, $0.20 per share in 2009 and $1.54 per share in 2008
 
 
 
 
(72,646)
 
 
(72,646)
Series A preferred stock dividends, $2,022 per share in 2009 and Preferred stock dividends, $2,418 per share in 2008
 
 
 
 
(10,635)
 
 
(10,635)
U.S. Treasury preferred stock dividends, $2,504 per share
 
 
 
 
(121,438)
 
 
(121,438)
Exercise of stock options and stock compensation expense
 
 
 
 
 
 
 
 
Accretion of discount associated with U.S. Treasury preferred stock
11,387 
 
 
 
(11,387)
 
 
Issuance of common stock in connection with SCAP capital plan
 
141,868 
 
 
 
 
 
 
Issuance of common stock in connection with SCAP capital plan
 
 
141,868 
1,687,299 
 
 
 
1,829,167 
Extinguishment of forward stock purchase contract
 
 
 
164,927 
 
 
 
164,927 
Repurchase of preferred stock
(314,227)
 
 
4,843 
89,425 
 
 
(219,959)
Exercise of stock options and stock compensation expense
 
 
 
8,631 
 
 
 
8,631 
Performance and restricted stock activity
 
1,676 
 
 
 
 
 
 
Performance and restricted stock activity
 
 
 
(186,168)
 
157,693 
 
(28,475)
Amortization of performance and restricted stock compensation
 
 
 
 
 
36,277 
 
36,277 
Issuance of stock for employee benefit plans
 
727 
 
 
 
 
 
 
Issuance of stock for employee benefit plans
 
 
 
(44,140)
(3)
56,859 
 
12,716 
Adoption of FSP FAS 115-2
 
 
 
 
7,715 2
 
(7,715)2
2
Other activity
 
 
 
 
 
 
 
 
Ending Balance
4,918,863 
 
514,667 
8,540,036 
9,271,388 
(1,115,782)1
823,986 
22,953,158 
Ending Balance
 
498,786 
 
 
 
 
 
 
Statement Of Shareholders Equity And Other Comprehensive Income (Parenthetical) (USD $)
6 Months Ended
Jun. 30,
2009
2008
Common stock dividends, per share
$ 0.20 
$ 1.54 
Preferred stock dividends, per share
2,022 
2,418 
U.S. Treasury preferred stock dividends, per share
2,504 
 
Retained Earnings
 
 
Common stock dividends, per share
0.20 
1.54 
Preferred stock dividends, per share
2,022 
2,418 
U.S. Treasury preferred stock dividends, per share
$ 2,504 
 
Statement Of Cash Flows Indirect Deposit Based Operations (USD $)
In Thousands
6 Months Ended
Jun. 30,
2009
2008
Cash Flows from Operating Activities:
 
 
Net income/(loss) including income attributable to noncontrolling interest
$ (991,872)
$ 837,019 
Adjustments to reconcile net income/(loss) to net cash (used in) provided by operating activities:
 
 
Net gain on sale of businesses
(119,038)
Visa litigation
7,000 
(39,124)
Gain from ownership in Visa
(112,102)
(86,305)
Depreciation, amortization and accretion
476,416 
424,403 
Impairment of goodwill/intangibles
751,156 
45,000 
Recovery of mortgage servicing rights impairment
(188,207)
Origination of mortgage servicing rights
(379,725)
(298,278)
Provisions for loan losses and foreclosed property
2,030,966 
1,037,958 
Amortization of performance and restricted stock compensation
36,277 
29,544 
Stock option compensation
8,631 
10,089 
Excess tax benefits from stock-based compensation
(352)
(782)
Net loss on debt extinguishment
13,560 
11,723 
Net securities losses/(gains)
21,522 1
(489,201)1
Net gain on sale/leaseback of premises
(37,039)
Net gain on sale of assets
(29,351)
(21,349)
Originated and purchased loans held for sale net of principal collected
(29,106,368)
(18,795,579)
Sales and securitizations of loans held for sale
24,801,073 
21,658,524 
Contributions to retirement plans
(18,664)
(2,806)
Net increase in other assets
(8,950)
(863,203)
Net decrease in other liabilities
(969,058)
(682,467)
Net cash (used in) provided by operating activities
(3,658,048)
2,619,089 
Cash Flows from Investing Activities:
 
 
Proceeds from maturities, calls and paydowns of securities available for sale
1,765,339 
794,509 
Proceeds from sales of securities available for sale
9,157,424 
1,638,126 
Purchases of securities available for sale
(13,127,424)
(1,715,803)
Proceeds from maturities, calls and paydowns of trading securities
60,710 
1,557,137 
Proceeds from sales of trading securities
2,042,528 
1,575,369 
Purchases of trading securities
(85,965)
(1,583,855)
Loan repayments/(originations), net
2,077,223 
(2,922,672)
Proceeds from sales of loans held for investment
499,576 
638,911 
Proceeds from sale of mortgage servicing rights
39,063 
Capital expenditures
(108,820)
(81,863)
Net cash and cash equivalents received for sale of businesses
214,115 
Net cash and cash equivalents (paid for)/acquired in acquisitions
(1,695)
92,081 
Proceeds from sale/redemption of Visa shares
112,102 
86,305 
Seix contingent consideration payout
(12,722)
Proceeds from the sale/leaseback of premises
245,276 
Proceeds from the sale of other assets
257,414 
128,902 
Net cash provided by investing activities
2,635,690 
705,601 
Cash Flows from Financing Activities:
 
 
Net increase (decrease) in consumer and commercial deposits
8,025,595 
(884,489)
Net (decrease) increase in foreign and brokered deposits
(2,997,010)
1,174,143 
Assumption of Omni National Bank deposits, net
445,482 
Net decrease in funds purchased, securities sold under agreements to repurchase, and other short-term borrowings
(1,404,478)
(1,372,078)
Proceeds from the issuance of long-term debt
574,560 
1,159,038 
Repayment of long-term debt
(8,409,350)
(3,002,951)
Proceeds from the exercise of stock options
18,837 
Excess tax benefits from stock-based compensation
352 
782 
Proceeds from the issuance of common stock
1,829,167 
Repurchase of preferred stock
(219,959)
Common and preferred dividends paid
(201,719)
(552,907)
Net cash used in financing activities
(2,357,360)
(3,459,625)
Net decrease in cash and cash equivalents
(3,379,718)
(134,935)
Cash and cash equivalents at beginning of period
6,637,402 
5,642,601 
Cash and cash equivalents at end of period
3,257,684 
5,507,666 
Supplemental Disclosures:
 
 
Loans transferred from loans held for sale to loans
297,319 
727,649 
Loans transferred from loans to other real estate owned
383,314 
279,383 
U.S. Treasury preferred dividend accrued but unpaid
3,000 
Accretion on U.S. Treasury preferred stock
11,387 
Extinguishment of forward stock purchase contract
164,927 
Gain on repurchase of Series A preferred stock
$ 89,425 
$ 0 
Notes to Financial Statements
6 Months Ended
Jun. 30, 2009
Note 1 - Significant Accounting Policies
Note 2 - Acquisitions / Dispositions
Note 3 - Securities Available for Sale
Note 4 - Allowance for Loan and Lease Losses
Note 5 - Premises and Equipment
Note 6 - Goodwill and Other Intangible Assets
Note 7 - Certain Transfers of Financial Assets, Mortgage Servicing Rights and Variable Interest Entities
Note 8 - Long-Term Debt and Capital
Note 9 - Earnings Per Share
Note 10 - Income Taxes
Note 11 - Employee Benefit Plans
Note 12 - Derivative Financial Instruments
Note 13 - Reinsurance Arrangements and Guarantees
Note 14 - Concentrations of Credit Risk
Note 15 - Fair Value Election and Measurement
Note 16 - Contingencies
Note 17 - Business Segment Reporting
Note 18 - Accumulated Other Comprehensive Income

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 presentation 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting”. This standard establishes the Codification as the source of authoritative U.S. GAAP recognized by the FASB for nongovernmental entities. The Codification will be effective for interim and annual periods ending after September 15, 2009. The Codification is a reorganization of existing U.S. GAAP and does not change existing U.S. GAAP. The Company will adopt this standard during the third quarter of 2009, which will have no impact on the Company’s financial position, results of operations, and earnings per share.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets”, and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. These standards are effective for the first interim reporting period of 2010. SFAS No. 166 amends the guidance in SFAS No. 140 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in FIN 46(R). Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. The Company is evaluating the impact that these standards will have on its financial statements. Based on current interpretations of these new standards and the Company’s current involvement with VIEs, the Company will likely consolidate certain VIEs and QSPEs that are not currently recorded on the Consolidated Balance Sheet of the Company, although the Company is still analyzing the potential impacts of these standards.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted SFAS No. 165 during the second quarter of 2009. In accordance with SFAS No. 165, the Company evaluated subsequent events through the date its financial statements are filed. The adoption of this standard did not have an impact on the Company’s financial position, results of operations, and earnings per share.

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The FSP amends the other-than-temporary impairment (“OTTI”) 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 determine 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 the recovery of its amortized cost basis. If either condition is met, an entity must recognize full impairment. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the FSP requires that the credit loss portion of impairment be recognized in earnings and the impairment related to all other factors be recognized in other comprehensive income. In addition, the FSP requires additional disclosures regarding impairments on debt and equity securities. The Company adopted this FSP effective April 1, 2009 and in connection therewith, recorded a $7.7 million, net of tax, reclassification to decrease other comprehensive income for impairment charges previously recorded through earnings with an offset to retained earnings as a cumulative effect adjustment. The enhanced disclosures related to FSP FAS 115-2 are included in Note 3, “Securities Available for Sale,” to the Consolidated Financial Statements.

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”. This FSP provides guidance on estimating fair value when there has been a significant decrease in the volume and level of activity for the asset or liability and for identifying transactions that may not be 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 Company adopted this FSP during the second quarter of 2009 and the adoption did not have a material impact on the Company’s financial position and results of operations, as the Company’s existing value methodologies were largely consistent with those of this FSP. The enhanced disclosures related to FSP FAS 157-4 are included in Note 15, “Fair Value Election and Measurement,” to the Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. 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 during the reporting period are also required to be disclosed both on an interim and annual basis. The Company adopted this FSP during the second quarter of 2009. The required disclosures have been included in Note 15, “Fair Value Election and Measurement,” to the Consolidated Financial Statements.

In June 2008, the FASB issued 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, results of operations, and earnings per share.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 generally 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. SFAS No. 160 is effective for annual periods beginning after December 15, 2008. The Company adopted this standard effective January 1, 2009, and is required to apply the standard retrospectively to all prior periods presented. Reclassifications of $112.7 million were made in the Consolidated Balance Sheet as of December 31, 2008 and $3.2 million and $6.1 million in the Consolidated Statements of Income/(Loss) for the three and six month periods ended June 30, 2008, respectively, to conform to the current period presentation.

Note 2 – Acquisitions / Dispositions

 

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

Comments

For the Six Months Ended June 30, 2009

           

Acquisition of Epic Advisors, Inc.

  4/1/09    ($2.0)   $5.0    $0.6    $-   

Goodwill and intangibles recorded are tax-deductible.

For the Six Months Ended June 30, 2008

           

Sale of First Mercantile Trust Company

  5/30/08    59.1    (11.7)   (3.0)   29.6  

Acquisition of GB&T Bancshares, Inc 1

  5/1/08    (154.6)   143.5    29.5     

Goodwill and intangibles recorded are non tax-deductible.

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.

1  On May 1, 2008, SunTrust acquired GB&T, a North Georgia-based financial institution serving commercial and retail customers, for $154.6 million, including cash paid for fractional shares, via the merger of GB&T with and into SunTrust. In connection therewith, GB&T shareholders received 0.1562 shares of the Company’s common stock for each share of GB&T’s common stock, resulting in the issuance of approximately 2.2 million shares of SunTrust common stock. As a result of the acquisition, SunTrust acquired approximately $1.4 billion of loans, primarily commercial real estate loans, and assumed approximately $1.4 billion of deposit liabilities. SunTrust elected to account for $171.6 million of the acquired loans at fair value in accordance with SFAS No. 159. The remaining loans are accounted for at amortized cost and had a carryover reserve for loan and lease losses of $158.7 million. The acquisition was accounted for under the purchase method of accounting with the results of operations for GB&T included in SunTrust’s results beginning May 1, 2008.

 

Note 3 – Securities Available for Sale

Securities available for sale at June 30, 2009 and December 31, 2008 were as follows:

 

     June 30, 2009
(Dollars in thousands)    Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

U.S. Treasury and federal agencies

   $570,158      $11,782      $2,030      $579,910  

U.S. states and political subdivisions

   989,470      22,908      8,186      1,004,192  

Residential mortgage-backed securities - agency

   14,220,431      178,678      12,693      14,386,416  

Residential mortgage-backed securities - private

   576,024      764      136,869      439,919  

Other debt securities

   634,791      2,074      17,708      619,157  

Common stock of The Coca-Cola Company

   69      1,439,631      -      1,439,700  

Other equity securities1

   995,071      926      -      995,997  
                   

    Total securities available for sale

           $17,986,014              $1,656,763              $177,486            $19,465,291  
                   

 

     December 31, 2008
(Dollars in thousands)    Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

U.S. Treasury and federal agencies

   $464,566      $21,889      $302      $486,153  

U.S. states and political subdivisions

   1,018,906      24,621      6,098      1,037,429  

Residential mortgage-backed securities - agency

   14,424,531      135,803      10,230      14,550,104  

Residential mortgage-backed securities - private

   629,174      8,304      115,327      522,151  

Other debt securities

   302,800      4,444      13,059      294,185  

Common stock of The Coca-Cola Company

   69      1,358,031      -      1,358,100  

Other equity securities1

   1,443,161      5,254      -      1,448,415  
                   

    Total securities available for sale

           $18,283,207              $1,558,346              $145,016            $19,696,537  
                   

 

1 Includes $343.3 million and $493.2 million of Federal Home Loan Bank (“FHLB”) of Cincinnati and FHLB of Atlanta stock stated at par value, $360.4 million and $360.9 million of Federal Reserve Bank stock stated at par value and $291.0 million and $588.5 million of mutual fund investments stated at fair value as of June 30, 2009 and December 31, 2008, respectively.

  

The amortized cost and fair value of investments in debt securities at June 30, 2009 by estimated average life are shown below. Actual cash flows may differ from estimated average lives and contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)    1 Year
or Less
   1-5
Years
   5-10
Years
   After 10
Years
   Total

Distribution of Maturities:

              

  Amortized Cost

              

Residential mortgage-backed securities - agency

   $81,425      $11,707,645      $1,434,328      $997,033      $14,220,431  

Other debt securities

   248,364      1,557,731      742,311      222,037      2,770,443  
                        

      Total debt securities

   $329,789      $13,265,376      $2,176,639      $1,219,070      $16,990,874  
                        

  Fair Value

              

Residential mortgage-backed securities - agency

   $83,041      $11,816,504      $1,488,660      $998,211      $14,386,416  

Other debt securities

   250,417      1,483,267      701,217      208,278      2,643,179  
                        

      Total debt securities

               $333,458              $13,299,771                  $2,189,877              $1,206,489              $17,029,595  
                        

Gross realized gains and losses on sales, and OTTI, on securities available for sale during the periods were as follows:

 

     Three Months Ended June 30    Six Months Ended June 30
(Dollars in thousands)    2009    2008    2009    2008

Gross realized gains

   $11,974      $557,885      $16,163      $561,374  

Gross realized losses

   (31,133)     (684)     (31,224)     (684) 

OTTI

   (5,740)     (7,414)     (6,461)     (71,489) 
                   

Net securities gains/(losses)

               ($24,899)                 $549,787                  ($21,522)                 $489,201  
                   

 

 

Securities with unrealized losses at June 30, 2009 and December 31, 2008 were as follows:

 

    June 30, 2009
    Less than twelve months   Twelve months or longer   Total
(Dollars in thousands)   Fair
            Value            
          Unrealized        
Losses
  Fair
            Value            
          Unrealized        
Losses
  Fair
        Value        
      Unrealized    
Losses

U.S. Treasury and federal agencies

  $253,604     $2,030     $-     $-     $253,604     $2,030  

U.S. states and political subdivisions

  181,775     5,623     52,710     2,563     234,485     8,186  

Residential mortgage-backed securities - agency

  4,369,215     12,689     176     4     4,369,391     12,693  

Residential mortgage-backed securities - private

  39,447     5,267     400,213     131,602     439,660     136,869  

Other debt securities

  109,424     2,029     138,772     15,679     248,196     17,708  
                       

Total securities with unrealized losses

  $4,953,465     $27,638     $591,871     $149,848     $5,545,336     $177,486  
                       
    December 31, 2008
    Less than twelve months   Twelve months or longer   Total
(Dollars in thousands)   Fair
Value
  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
  Fair
Value
  Unrealized
Losses

U.S. Treasury and federal agencies

  $43,584     $302     $23     $-     $43,607     $302  

U.S. states and political subdivisions

  169,693     4,980     14,879     1,118     184,572     6,098  

Residential mortgage-backed securities - agency

  3,354,319     10,223     472     7     3,354,791     10,230  

Residential mortgage-backed securities - private

  450,653     98,696     40,269     16,631     490,922     115,327  

Other debt securities

  143,666     6,901     28,944     6,158     172,610     13,059  
                       

Total securities with unrealized losses

  $4,161,915     $121,102     $84,587     $23,914     $4,246,502     $145,016  
                       

On June 30, 2009, the Company held certain investment securities having unrealized loss positions. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before their anticipated recovery. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies outlined in Note 1, “Significant Accounting Policies,” to the Consolidated Financial Statements. Market changes in interest rates and credit spreads will result in temporary unrealized losses as the market price of securities fluctuates. The turmoil and illiquidity in the financial markets during 2008 and 2009 have increased market yields on securities as a result of credit spreads widening. This shift in market yields resulted in unrealized losses on certain securities within the Company’s portfolio that continued during the first six months of 2009. The unrealized loss of $136.9 million in private residential mortgage-backed securities (“MBS”) as of June 30, 2009 primarily includes retained interests from securitizations that were highly rated upon issuance and remain above investment grade. The unrealized loss is evaluated quarterly for OTTI using cash flow models. Based on an analysis of the underlying cash flows of these securities, the unrealized loss is a result of the current illiquidity and risk premiums reflected in the market. The unrealized loss of $12.7 million in agency residential MBS is related to securities that are predominantly guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. The unrealized loss of $17.7 million in other debt securities is primarily related to senior and subordinated corporate bond positions. As of June 30, 2009, approximately 93% of the total securities available for sale portfolio are rated “AAA,” the highest possible rating by nationally recognized rating agencies.

For the three months ended June 30, 2009, the Company recorded OTTI losses on available for sale securities as follows:

 

    Three Months Ended June 30, 2009
    Residential
Mortgage-Backed
  Securities - Private  
  Other
        Securities        

Total realized and unrealized OTTI losses

  $8,355     $212  

Portion of unrealized losses recognized in other comprehensive income (before taxes)

  2,827     -  
       

Net impairment losses recognized in earnings

  $5,528     $212  
       

While all securities are reviewed for OTTI, the securities primarily impacted by credit impairment are private residential MBS. For these securities, impairment is determined through the use of cash flow models that estimate cash flows on the underlying mortgages, using security specific collateral and the transaction structure. The cash flow models incorporate the remaining cash flows which are adjusted for future expected credit losses. Future expected credit losses are determined by using various assumptions such as current default rates, prepayment rates, and loss severities. The Company develops these assumptions through the use of market data published by third-party sources in addition to historical analysis which includes actual delinquency and default information through the current period. The expected cash flows are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. The following table presents a summary of the significant inputs considered in determining the measurement of credit losses recognized in earnings for private residential MBS:

 

 

             June 30        
2009

Current default rate

   0-17%

Prepayment rate

   9-14%

Loss severity

   35-52%

The following is a rollforward of credit losses recognized in earnings for the three months ended June 30, 2009 related to securities for which some portion of the impairment was recorded in other comprehensive income.

 

(Dollars in thousands)          Three Months      
Ended June 30,

2009

Balance, as of April 1, 2009

   $7,646  

Additions:

  

OTTI credit losses on securities not previously impaired

   4,805  
    

Balance, as of June 30, 2009

   $12,451  
    

The Company adopted FSP FAS 115-2 and FAS 124-2 on April 1, 2009 and in conjunction therewith analyzed the securities for which it had previously recognized OTTI and recognized a cumulative effect adjustment representing the non-credit component of OTTI of $7.7 million, net of tax. The Company had previously recorded the non-credit component as impairment in earnings and therefore this amount was reclassified from retained earnings to other comprehensive income. The beginning balance of $7.6 million, pre-tax, represents the credit loss component which remained in retained earnings related to the securities for which a cumulative effect adjustment was recorded. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected, discounted using the securities’ initial effective interest rate, and the amortized cost basis of these securities. The total OTTI impairment related to factors other than credit and therefore, recognized in accumulated other comprehensive income (“AOCI”), totaled $9.5 million as of June 30, 2009.

Note 4 – Allowance for Loan and Lease Losses

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

 

             Three Months Ended        
June 30
  %
  Change  
              Six Months Ended        
June 30
  %
  Change  
   
(Dollars in thousands)    2009   2008       2009   2008    

Balance at beginning of period

   $2,735,000    $1,545,340     77.0     %   $2,350,996     $1,282,504     83.3     %

Allowance from GB&T acquisition

   -         158,705     (100.0)      -         158,705     (100.0)   

Provision for loan losses

   962,181     448,027     114.8       1,956,279     1,008,049     94.1    

Loan charge-offs

   (835,558)    (355,565)    135.0       (1,482,474)    (678,261)    118.6    

Loan recoveries

   34,377     32,893     4.5       71,199     58,403     21.9    
                        

Balance at end of period

   $2,896,000     $1,829,400     58.3     %   $2,896,000     $1,829,400     58.3     %
                        

Note 5 – Premises and Equipment

During the six months ended June 30, 2008, the Company completed sale/leaseback transactions, consisting of 149 branch properties and various individual office buildings. In total, the Company sold and concurrently leased back $156.7 million in land and buildings with associated accumulated depreciation of $81.1 million. Net proceeds were $245.3 million, resulting in a gain, net of transaction costs of $169.7 million. During the first quarter of 2008, the Company recognized $37.0 million of the gain in earnings. The remaining $132.7 million in gains were deferred and will be recognized ratably over the expected term of the respective leases, which is 10 years.

Note 6 – Goodwill and Other Intangible Assets

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 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 economic downturn, which resulted in depressed earnings in these businesses and the significant decline in the Company’s market capitalization during the first quarter.

During the second quarter of 2009, the Company determined that, for its Corporate and Investment Banking reporting unit, it continued to be more likely than not that the fair value of the reporting unit would be below the carrying value of its equity. As a result, the Company performed a complete evaluation of the Corporate and Investment Banking goodwill, which involved estimating the implied fair value of goodwill as of June 30, 2009. The estimates of the fair value of the reporting unit and the implied fair value of goodwill were determined in accordance with the Company’s policy as discussed in Note 1, “Significant Accounting Policies,” to the Consolidated Financial Statements of Form 10-K. 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 as of June 30, 2009. For the remaining reporting units that have goodwill (Retail and Commercial and Wealth and Investment Management), there were no significant changes during the second quarter to indicate that the fair value of those reporting units would have decreased below their respective carrying values.

Changes in the carrying amount of goodwill by reportable segment for the six months ended June 30 are as follows:

 

(Dollars in thousands)    Retail and
  Commercial  
   Wholesale    Corporate
and
Investment
Banking
   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 1

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

Goodwill impairment

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

Seix contingent consideration

   -      -            -      12,722        12,722  

Purchase of Epic Advisors, Inc.

   -      -            -      5,012        5,012  

Other

   474      -            -      3,827        4,301  
                                       

Balance, June 30, 2009

     $5,738,803      $-    $223,307     $-    $-    $352,272     $-        $6,314,382  
                                       

 

1

Goodwill was reallocated among the reportable segments as a result of the corporate restructuring described in Note 17, “Business Segment Reporting,” to the Consolidated Financial Statements.

Changes in the carrying amounts of other intangible assets for the six months ended June 30 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

  (29,180)    (113,077)    -     (11,269)    (153,526) 

Mortgage servicing rights (“MSRs”) originated

  -     298,278     -     -     298,278  

MSRs impairment reserve

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

MSRs impairment recovery

  -     1,881     -     -     1,881  

Sale of interest in Lighthouse Partners

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

Sale of MSRs

  -     (41,176)    -     -     (41,176) 

Customer intangible impairment charge

  -     -     -     (45,000)    (45,000) 

Acquisition of GB&T

  29,510     -     -       29,510  

Sale of First Mercantile Trust

  -     -     -     (3,033)    (3,033) 
                   

Balance, June 30, 2008

  $172,985     $1,193,450     $-     $75,621     $1,442,056  
                   

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

  (22,166)    (130,494)    -     (7,777)    (160,437) 

MSRs originated

  -     -     379,725     -     379,725  

MSRs impairment recovery

  -     188,207     -     -     188,207  

Changes in fair value

         

Due to changes in inputs or assumptions 1

  -     -     115,251     -     115,251  

Other changes in fair value 2

  -     -     (40,841)    -     (40,841) 

Other

  -     -     -     151     151  
                   

Balance, June 30, 2009

  $123,145     $680,383     $641,939     $72,016     $1,517,483  
                   

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.

The Company elected to create a second class of MSRs effective January 1, 2009. This new class of MSRs is reported at fair value and is being actively hedged as discussed in Note 12, “Derivative Financial Instruments,” to the Consolidated Financial Statements. 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 7 – 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 15, “Fair Value Election and Measurement,” to the Consolidated Financial 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/(losses) and commissions or as a component of 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 due to underlying credit impairment, the estimated credit component of such loss is recorded in securities gains/(losses). See Note 1, “Significant Accounting Policies” for a discussion of the impacts of SFAS No. 167 on certain of the Company’s involvements with VIEs discussed herein.

Residential Mortgage Loans

The Company 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 and Note 6, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements 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 June 30, 2009 that changed the status of the QSPEs or the nature of the transactions, which would call 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, including those transferred to Ginnie Mae, Fannie Mae, and Freddie Mac, which are discussed in Note 13, “Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements. Additionally, 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 quarter ended June 30, 2009; however, the Company accrued $13 million for contingent losses related to certain of its representations and warranties made in connection with prior transfers of second lien loans. The Company continues to evaluate all facts and circumstances around these loans.

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 its retained 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 had 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 VI in the third party conduits as it relates to the unparticipated portion of the loans. In the first quarter of 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 June 30, 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 $444.8 million and $500.7 million at June 30, 2009 and December 31, 2008, respectively. No events have occurred during the quarter ended June 30, 2009 that would call 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 June 30, 2009 and December 31, 2008, the Company’s direct exposure to loss related to these VIEs was approximately $13.2 million and $16.7 million, respectively, which represent the Company’s interests in preference shares of these entities. In the first quarter of 2009, the Company recognized losses of $6.8 million which represented the complete write off of the preference shares in all of the commercial loan and bond securitization vehicles due to the continued deterioration in the performance of the collateral in those vehicles. The Company does not expect to receive any significant cash distributions on those preference shares in the foreseeable future. At June 30, 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 quarter ended June 30, 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 June 30, 2009 and December 31, 2008 was $14.1 million and $13.4 million, respectively. No events have occurred during the quarter ended June 30, 2009 that changed the status of the QSPEs or the nature of the transactions, which would call into question either the Company’s sale accounting or the QSPE status of the transferees.

CDO Securities

The Company has 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. During the three and six month periods ended June 30, 2009, the Company received $1.2 million and $1.6 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”) transactions discussed in Note 16, “Contingencies,” to the Consolidated Financial Statements. No events have occurred during the quarter ended June 30, 2009 that would call 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 $1.9 billion at June 30, 2009 and $2.0 billion at December 31, 2008. The Company is not obligated to provide any support to these entities and its maximum exposure to loss at June 30, 2009 and December 31, 2008 is limited to (i) the current positions held in trading securities with a fair value of $43.0 million and $45.0 million, respectively, and (ii) the remaining securities expected to be purchased in conjunction with the ARS issue, which have a total fair value of $2.0 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 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 the three and six months ended June 30, 2009 and June 30, 2008. The Company did not execute any asset transfers in the periods presented.

 

     Three and Six Months Ended June 30, 2009
(Dollars in thousands)    Residential Mortgage
Loans
   Commercial Mortgage
Loans
   Commercial and
Corporate Loans
   Student Loans    CDO Securities    Consolidated
     Second
Quarter
   Year to
Date
   Second
Quarter
   Year to
Date
   Second
Quarter
   Year to
Date
   Second
Quarter
   Year to
Date
   Second
Quarter
   Year to
Date
   Second
Quarter
   Year to Date
                             

Cash flows on interests held

   $26,262    $52,389     $-     $-     $308    $702     $3,377    $3,715     $1,204    $1,644     $31,151    $58,450 

Servicing or management fees

   1,266    2,602           1,865    4,848     153    357     -       3,284    7,807 
     Three and Six Months Ended June 30, 2008
(Dollars in thousands)    Residential Mortgage
Loans
   Commercial Mortgage
Loans
   Commercial and
Corporate Loans
   Student Loans    CDO Securities    Consolidated
         Second    
Quarter
     Year to  
Date
       Second    
Quarter
     Year to  
Date
       Second    
Quarter
     Year to  
Date
       Second    
Quarter
     Year to  
Date
     Second  
Quarter
     Year to  
Date
       Second    
Quarter
   Year to Date
                             

Cash flows on interests held

   $23,395    $50,405     $-    $-     $11,800    $15,901     $4,032    $4,488     $837    $1,486     $40,064    $72,280 

Servicing or management fees

   1,506    3,084     54    120     4,006    7,393     209    423     -       -        5,775    11,020 

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 other than those related to Ginnie Mae, Fannie Mae, and Freddie Mac as discussed in Note 13, “Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements.

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 June 30, 2009, the total fair value of such interests was approximately $301.5 million, as compared to $367.0 million at December 31, 2008. The weighted average remaining lives of the Company’s retained interests ranged from approximately 3 years to 18 years for interests in residential mortgage loans, commercial and corporate loans, and student loans as of June 30, 2009 and December 31, 2008, with the weighted average remaining life of interests in CDO securities approximating 24 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 $20.8 million and $37.5 million, respectively, as of June 30, 2009, as compared to approximately $22.2 million and $45.7 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 June 30, 2009 and December 31, 2008, the fair values of these subordinated interests were $3.5 million and $4.4 million respectively, based on weighted average prices of 11.0% and 12.3% of par, respectively. Expected static pool losses were approximately 0.4% to 7% for interests related to securitizations of residential mortgage loans as of June 30, 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 27% to 39% and 23% to 31% as of June 30, 2009 and December 31, 2008, respectively.

Portfolio balances and delinquency balances based on 90 days or more past due (including accruing and nonaccrual loans) as of June 30, 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 and six month periods ended June 30, 2009 and June 30, 2008 are as follows:

 

(Dollars in millions)

   Principal Balance    Past Due    Net Charge-offs
       June 30,         December 31,       June 30,       December 31,         For the Three Months    
Ended June 30,
     For the Six Months Ended  
June 30,
   2009    2008    2009    2008    2009    2008    2009    2008

Type of loan:

                       

Commercial

   $37,960.9      $41,039.9      $767.3      $340.9      $149.6      $34.5      $281.3      $62.7  

Residential mortgage and home equity

   48,287.2      48,520.2      3,687.8      2,727.6      512.5      213.6      851.4      417.8  

Commercial real estate and construction

   24,034.9      24,821.1      1,970.3      1,492.6      85.3      35.7      168.4      58.9  

Consumer

   11,527.7      11,646.9      489.2      411.1      31.8      32.8      71.5      70.1  

Credit card

   1,005.5      970.3      -      -      22.0      6.0      38.7      10.4  
                                       

Total loan portfolio

   122,816.2      126,998.4      6,914.6      4,972.2      801.2      322.6      1,411.3      619.9  

Managed securitized loans

                       

Commercial

   3,673.8      3,766.8      89.1      30.2      12.9      -        19.9      -    

Residential mortgage

   1,647.0      1,836.2      105.4      132.2      14.8      5.6      23.9      9.8  

Other

   527.2      565.2      26.3      61.6      0.1      0.1      0.2      0.1  
                                       

Total managed loans

   $128,664.2      $133,166.6      $7,135.4      $5,196.2      $829.0      $328.3      $1,455.3      $629.8  
                                       

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 warranties 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 $116.1 billion and $106.6 billion at June 30, 2009 and December 31, 2008, respectively. Related servicing fees received by the Company during the three and six month periods ended June 30, 2009 and June 30, 2008 were $78.5 million and $75.1 million and $154.7 million and $145.4 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/(Loss) in mortgage servicing-related income. See Note 6, “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 and six month periods ended June 30, 2009 and June 30, 2008 was $81.8 million and $87.0 million and $163.6 million and $172.1 million, respectively. These amounts are reported in mortgage servicing-related income in the Consolidated Statements of Income/(Loss).

As of June 30, 2009 and December 31, 2008, the total unpaid principal balance of mortgage loans serviced was $173.1 billion and $162.0 billion, respectively. Included in these amounts were $137.2 billion and $130.5 billion as of June 30, 2009 and December 31, 2008, respectively, of loans serviced for third parties. As of June 30, 2009 and December 31, 2008, the Company had established valuation allowances of $17.7 million and $370.0 million, respectively. No permanent impairment losses were recorded against the allowance during the year ended December 31, 2008 or the six months ended June 30, 2009.

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 June 30, 2009 and December 31, 2008 fair values to immediate 10% and 20% adverse changes in those assumptions follows.

 

(Dollars in millions)    2009
    Fair Value    
   2009
  Lower of Cost  
or Market
   2008
  Lower of Cost  
  or Market 

Fair value of retained MSRs

   $641.9      $766.6      $815.6    

Prepayment rate assumption (annual)

   13.8%    21.1%    32.8%  

Decline in fair value of 10% adverse change

   $28.8      $46.6      $61.2    

Decline in fair value of 20% adverse change

   55.2      88.7      113.8    

Discount rate (annual)

   10.0%    10.2%    9.3%  

Decline in fair value of 10% adverse change

   $27.6      $26.9      $17.9    

Decline in fair value of 20% adverse change

   53.0      52.0      35.0    

Weighted-average life (in years)

   6.49      4.11      2.50    

Weighted-average coupon

   5.47      6.16      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 certain VIEs, 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 has historically financed this activity by issuing A-1/P-1 rated commercial paper (“CP”); however, in the three months ended June 30, 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 of the asset quality of Three Pillars. Three Pillars had no other form of senior funding outstanding, other than CP, as of June 30, 2009 or December 31, 2008. (See below where the impacts of the downgrade are further discussed.)

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 CP holders; and providing liquidity arrangements that would provide funding to Three Pillars in the event it can no longer issue CP 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 $15.6 million and $14.3 million, and $33.2 million and $20.6 million, for the three and six month periods ended June 30, 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 June 30, 2009 and December 31, 2008, and no losses had been incurred through June 30, 2009.

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 VI holders in Three Pillars. The Company and this note holder are not related parties or de facto agents of one another. The Company uses 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 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 and the forecasted growth in Three Pillars’ assets; as such, the Company 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 forecasted or actual 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 June 30, 2009 and December 31, 2008, Three Pillars had assets not included on the Company’s Consolidated Balance Sheets of approximately $2.7 billion and $3.5 billion, respectively, consisting primarily of secured loans. Funding commitments and outstanding receivables extended by Three Pillars to its customers totaled $4.9 billion and $2.7 billion, respectively, as of June 30, 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 49% and 14%, respectively, of the outstanding commitments, as of June 30, 2009, as compared to 47% and 20%, respectively, as of December 31, 2008. Assets supporting those commitments have a weighted average life of 1.32 years and 1.52 years at June 30, 2009 and December 31, 2008, respectively. At June 30, 2009, Three Pillars’ outstanding CP used to fund the assets totaled $2.7 billion, with remaining weighted average lives of 12.1 days and maturities through August 2009.

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 features 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 Bank 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 related to Three Pillars assets for which the Company expects to suffer material losses. During the six months ended June 30, 2009 and 2008, there were no write-downs of Three Pillars’ assets.

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. None of the Company’s purchases of CP during 2008 altered the Company’s conclusion that it is not the primary beneficiary of Three Pillars.

 

The downgrade of Three Pillars’ credit rating to A-2 by S&P during the three months ended June 30, 2009 negatively impacted its ability to issue CP to third party investors. As a result, the Company held approximately $2.4 billion of overnight CP at estimated market rates at June 30, 2009, which it purchased on a discretionary and non-contractual basis, as the Company monitored the impacts of the downgrade on Three Pillars. Subsequent to the S&P downgrade, the Company successfully completed its capital plan under the “stress test”, which included a successful common equity raise and tender offer for certain of its preferred stock and hybrid debt instruments. Additionally, in June 2009, Three Pillars received an F-1 rating from Fitch and chose to replace S&P’s A-2 rating, which was simultaneously withdrawn. As such, Three Pillars’ CP now carries an F-1/P-1 rating. The full impacts of the F-1 rating on Three Pillars’ CP will not be immediate, but Three Pillars has generally issued 18% to 38% of its CP to investors other than the Company subsequent to June 30, 2009. The Company anticipates its purchases of CP will decline over time. The purchases of CP by the Company during the second quarter of 2009 did not alter the allocation of variability within Three Pillars in a manner that was not originally considered, nor was it a means for the Company to provide non-contractual support to Three Pillars in order to protect any VI holders from losses. The predominant driver of risk is the credit risk of the underlying assets owned by Three Pillars and S&P’s downgrade was not in response to any credit deterioration in these assets. Further, the subordinated note holder remains exposed to the majority of variability in expected losses in Three Pillars to the same degree it had prior to any purchases of CP by the Company. The Company’s at-market purchases of CP do not impact the interest rates paid by the clients of Three Pillars, as they are obligated to pay a pass through rate based on the rate at which Three Pillars issues CP. After evaluating all facts and circumstances, the Company concluded that the results of the mathematical model that the Company uses to support its conclusion that it is not the primary beneficiary of Three Pillars has not changed, the design of Three Pillars has not changed, and the purchases of CP by the Company has not given rise to an implicit VI in Three Pillars that would result in the Company becoming the primary beneficiary of Three Pillars. The Company will continue to monitor the key considerations surrounding determining Three Pillars’ primary beneficiary. The impact from owning, as of June 30, 2009, approximately 90% of Three Pillars’ CP resulted in a similar increase to the Company’s assets and liabilities that consolidating Three Pillars would have had on the Company’s balance sheet.

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 CP cannot be issued by Three Pillars to repay maturing CP. 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 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. 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 CP 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 total notional amounts of the liquidity facilities and other credit enhancements represent the Company’s maximum exposure to potential loss, which was $5.0 billion and $490.8 million, respectively, as of June 30, 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 June 30, 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 and six month periods ended June 30, 2009 or 2008. There are no other contractual arrangements that the Company plans to enter into with Three Pillars to provide it additional support.

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 June 30, 2009 and December 31, 2008, the Company had $2.1 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, as the VIEs are designed for the benefit of the third parties. The third parties have implicit VIs 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 June 30, 2009 and December 31, 2008, these VIEs had entered into TRS with the Company that had outstanding notional of $2.1 million and $602.1 million, respectively. All remaining positions were liquidated subsequent to June 30, 2009. The Company has not provided any support that it was not contractually obligated to for the six months ended June 30, 2009 or the year ended December 31, 2008. The Company decided to temporarily suspend this business in late 2008 and terminated its existing transactions during 2009. For additional information on the Company’s TRS with these VIEs, see Note 12, “Derivative Financial Instruments” to the Consolidated Financial Statements.

Community Development Investments

As part of its community reinvestment initiatives, the Company invests almost exclusively within 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 VIs 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 June 30, 2009 and December 31, 2008, total assets, which consist primarily of fixed assets and cash attributable to the consolidated partnerships, were $19.2 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 the Company’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 June 30, 2009 and December 31, 2008. While the obligations of the general partner or indemnifying entity are generally non-recourse to 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 the partnerships may have generated.

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 June 30, 2009 and December 31, 2008, respectively. These limited partner interests had carrying values of $203.7 million and $188.9 million at June 30, 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 $473.2 million at June 30, 2009 and December 31, 2008. The Company’s maximum exposure to loss would be borne by the loss of the limited partnership equity investments along with $211.9 million and $202.7 million of loans issued by the Company to the limited partnerships at June 30, 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 the Company 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, the Company 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 June 30, 2009 and December 31, 2008, total assets, which consist primarily of fixed assets and cash, attributable to the consolidated, non-VIE partnerships were $481.9 million and $493.5 million, respectively, and total liabilities, excluding intercompany liabilities, primarily representing third-party borrowings, were $331.8 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.

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 June 30, 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 the 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 June 30, 2009 and December 31, 2008, the Company still owned securities purchased from these three funds of $204.0 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 the Company took in 2008 and 2007 relating to these funds.

Note 8 – Long-Term Debt and Capital

The Company’s long term debt decreased from $26.8 billion at December 31, 2008 to $18.8 billion at June 30, 2009 as a result of the repayment of $6.9 billion of its FHLB advances, $3.4 billion of which were at fair value. The Company also repaid $0.2 billion of its floating rate euro denominated notes that were due in 2011.

As part of the Company’s participation in the Supervisory Capital Assessment Program (“SCAP”), the Company completed certain transactions as part of an announced capital plan during the second quarter of 2009 that increased its Tier 1 common equity by $2.1 billion. The transactions utilized to raise the capital consisted of the issuance of common stock, the repurchase of certain preferred stock and hybrid debt securities, and the sale of Visa Class B shares.

 

  

The common stock offerings that the Company completed in conjunction with the capital plan added 141.9 million in new common shares and resulted in $1.8 billion in additional Tier 1 common equity, net of issuance costs.

  

Also as part of the capital plan, the Company initiated a cash tender offer to repurchase a defined maximum amount of its outstanding Series A preferred stock. 3,142 shares of the Company’s Series A preferred stock were repurchased, resulting in a decrease in preferred stock of $314.2 million. An after-tax gain of $89.4 million was included in net loss available to common shareholders and an increase of $91.0 million was realized in Tier 1 common equity during the three month period ended June 30, 2009. In addition, the Company also repurchased approximately $0.4 billion of its 5.588% Parent Company junior subordinated notes due 2042, and approximately $0.1 billion of its 6.10% Parent Company junior subordinated notes due 2036. These transactions resulted in a net after-tax loss of $44.1 million, as a result of a $164.9 million after-tax loss related to the extinguishment of the preferred stock forward sale agreement associated with the repurchase of the 5.588% Parent Company junior subordinated notes, and a $120.8 million after-tax gain from the repurchase of the Parent Company junior subordinated notes; the aggregate impact of the debt repurchases was a $120.8 million increase to Tier 1 common equity.

 

 

  

Another element of the capital plan involved the sale of the Company’s Visa Class B shares resulting in an after-tax gain and increase in Tier 1 common equity of approximately $70 million.

The Company is subject to various regulatory capital requirements which involve quantitative measures of the Company’s assets.

 

(Dollars in millions)    June 30
2009
    December 31
2008
 

Tier 1 capital

   $18,577.8        $17,613.7     

Total capital

   23,247.5        22,743.4     

Risk-weighted assets

   151,886.2        162,046.4     

Tier 1 capital

   $18,577.8        $17,613.7     

Less:

    

    Qualifying trust preferred securities

   2,411.6        2,847.3     

    Preferred stock

   4,918.9        5,221.7     

    Allowable minority interest

   105.3        101.8     
            

Tier 1 common equity

               $11,142.0                $9,442.9     

  Risk-based ratios:

    

  Tier 1 common equity

   7.34     5.83  

  Tier 1 capital

   12.23        10.87     

  Total capital

   15.31        14.04     

  Tier 1 leverage ratio

   11.02        10.45     

Note 9 - Earnings Per Share

Net income/(loss) is the same in the calculation of basic and diluted earnings/(loss) per share. Equivalent shares of 36.0 million and 16.5 million related to common stock options and common stock warrants outstanding as of June 30, 2009 and 2008, respectively, were excluded from the computations of diluted earnings/(loss) per share because they would have been antidilutive. A reconciliation of the difference between average basic common shares outstanding and average diluted common shares outstanding for the three and six months ended June 30, 2009 and 2008 is included below. Additionally, included below is a reconciliation of net income/(loss) to income/(loss) available to common shareholders.

 

     Three Months Ended
June 30
   Six Months Ended
June 30
(In thousands, except per share data)    2009    2008    2009    2008

Net income/(loss)

   ($183,460)     $540,362      ($998,627)     $830,917  

Series A preferred dividends

   (5,635)     (5,112)     (10,635)     (12,089) 

U.S. Treasury preferred dividends

   (66,546)     -      (132,825)     -  

Gain on repurchase of Series A preferred stock

   89,425      -      89,425      -  

Dividends and undistributed earnings allocated to unvested shares

   1,788      (5,282)     12,853      (7,305) 
                   

Net income/(loss) available to common shareholders

       ($164,428)       $529,968          ($1,039,809)       $811,523  
                   

Average basic common shares

   399,242      348,714      375,429      347,647  

Effect of dilutive securities:

           

     Stock options

   -      176      -      366  

     Performance and restricted stock

   -      893      -      914  
                   

Average diluted common shares

   399,242      349,783      375,429      348,927  
                   

Earnings/(loss) per average common share - diluted

   ($0.41)     $1.52      ($2.77)     $2.33  
                   

Earnings/(loss) per average common share - basic

   ($0.41)     $1.52      ($2.77)     $2.33  
                   

Note 10 - Income Taxes

The provision for income taxes was a benefit of $149.0 million and an expense of $202.8 million for the three months ended June 30, 2009 and 2008, respectively, representing effective tax rates of (44.8)% and 27.3% during those periods. The provision for income taxes was a benefit of $299.7 million and an expense of $294.5 million for the six months ended June 30, 2009 and 2008, respectively, representing effective tax rates of (23.1)% and 26.2% during those periods. The Company calculated the benefit for income taxes for the three and six months ended June 30, 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 and six months ended June 30, 2008.

As of June 30, 2009, the Company’s gross cumulative unrecognized tax benefits (“UTBs”) amounted to $337.1 million, of which $271.2 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 UTBs amounted to $330.0 million. Additionally, the Company recognized a gross liability of $78.9 million and $70.9 million for interest related to its UTBs as of June 30, 2009 and December 31, 2008, respectively. Interest expense related to UTBs was $3.8 million for the three month period ended June 30, 2009, compared to $20.2 million for the same period in 2008. Interest expense related to UTBs was $11.4 million for the six month period ended June 30, 2009, compared to $24.5 million for the same period in 2008. The Company continually evaluates the UTBs associated with its uncertain tax positions. It is reasonably possible that the total UTBs could decrease during the next 12 months by approximately $5 million to $30 million due to the completion of tax authority examinations and the expiration of statutes of limitations.

The Company’s federal returns through 2004 have been examined by the Internal Revenue Service (“IRS”) and issues for tax years 1999 through 2004 are still in dispute. 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 11 - Employee Benefit Plans

Stock-Based Compensation

The weighted average fair values of options granted during the first six months of 2009 and 2008 were $5.13 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:

 

     Six Months Ended June 30
     2009        2008

Expected dividend yield

   4.16  %        4.58  % 

Expected stock price volatility

   83.17              21.73      

Risk-free interest rate (weighted average)

   1.94              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

   3,803,796      9.06      9.06      2,264,175      22,069      9.07 

Exercised/vested

   -      -      -      (1,141,632)     -      64.16 

Cancelled/expired/forfeited

   (652,042)     9.06 - 149.81      56.67      (215,340)     (10,778)     50.05 

Amortization of compensation element

  of performance and restricted stock

   -      -      -      -      (36,277)    
                             

Balance, June 30, 2009

           18,793,626      $9.06 - $150.45                  $54.21              4,710,615              $88,408                $39.01 
                             
                 
                     

Exercisable, June 30, 2009

   13,114,730         $65.37           
                     

Available for additional grant, June 30, 2009 1

   8,780,678                 
                   

 

1

Includes 4,860,492 shares available to be issued as restricted stock.

The following table presents information on stock options by ranges of exercise price at June 30, 2009:

 

(Dollars in thousands except per share data)

 

    Options Outstanding   Options Exercisable

Range of Exercise

Prices

  Number
Outstanding at
June 30, 2009
  Weighted-
Average
Exercise Price
  Weighted-
Average
Remaining
Contractual Life
(Years)
  Aggregate
Intrinsic
Value
  Number
Exercisable at
June 30, 2009
  Weighted-
Average Exercise
Price
  Weighted-
Average
Remaining
Contractual
Life (Years)
  Aggregate
Intrinsic
Value
  $9.06 to $49.46   4,516,376     $14.33     8.88     $27,499     495,280     $44.70     2.90     $-  
  $49.47 to $64.57   5,155,357     56.46     2.75     -     5,155,357     56.46     2.75     -  
  $64.58 to $150.45   9,121,893     72.68     4.99     -     7,464,093     72.91     4.25     -  
                             
  18,793,626     $54.21     5.31             $27,499           13,114,730     $65.37             3.61             $-  
                               

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

 

     Three Months Ended
June 30
   Six Months Ended
June 30
(In thousands)    2009    2008    2009    2008

Stock-based compensation expense:

           

  Stock options

   $3,565     $3,350     $6,478     $6,834 

  Performance and restricted stock

   15,994     19,396     36,277     29,544 
                   

Total stock-based compensation expense

         $19,559             $22,746           $42,755             $36,378 
                   

The recognized stock-based compensation tax benefit amounted to $7.4 million and $8.6 million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, the recognized stock-based compensation tax benefit was $16.2 million and $13.8 million, respectively.

Certain employees received long-term deferred cash awards during the first quarter of 2009 and 2008, which were subject to a three year vesting requirement. The accrual related to these deferred cash grants was $18.1 million and $4.0 million as of June 30, 2009 and 2008, respectively.

Retirement Plans

SunTrust did not contribute to either of its noncontributory qualified retirement plans (“Retirement Benefits” plans) in the second quarter of 2009. Effective July 1, 2009 the interest crediting rate used to determine future interest on Personal Pension Accounts in the SunTrust Retirement Plan will change from the IRS Composite Corporate Bond rate to the 30-year Treasury Bond rate. As a result, the plan’s 2009 pension cost was remeasured on April 30, 2009 at a discount rate of 6.90%. The remeasurement resulted in a $170.2 million reduction in the projected benefit obligation and $28.9 million reduction in pension expense to be recognized over the remainder of 2009. The second quarter pension cost reflects a $7.2 million reduction as a result of this remeasurement. The expected long-term rate of return on plan assets for the Retirement Benefit plans remained at 8.00% for 2009.

Anticipated employer contributions/benefit payments for 2009 are $24.0 million for the Supplemental Retirement Benefit plans. For the second quarter of 2009, the actual contributions/benefit payments totaled $17.2 million. Actual contributions/benefit payments for the six months ended June 30, 2009 were $18.4 million.

SunTrust contributed $0.2 million to the Postretirement Welfare Plan in the second quarter of 2009. Additionally, SunTrust expects to receive a Medicare Subsidy reimbursement in the amount of $3.3 million. The expected long-term rate of return on plan assets for the Postretirement Welfare plan is 7.25% for 2009.

 

    Three Months Ended June 30
    2009   2008
(Dollars in thousands)   Pension
Benefits
  Other
Postretirement
Benefits
  Pension
Benefits
  Other
Postretirement
Benefits

Service cost

  $15,967     $73     $19,468     $155  

Interest cost

  29,898     2,803     29,273     2,953  

Expected return on plan assets

  (37,288)    (1,758)    (46,414)    (2,047) 

Amortization of prior service cost

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

Recognized net actuarial loss

  28,013     4,648     5,556     3,187  
               

Net periodic benefit cost

          $33,869     $5,376             $5,091     $3,858  
               
   

 

Six Months Ended June 30

    2009   2008
(Dollars in thousands)   Pension
Benefits
  Other
Postretirement
Benefits
  Pension
Benefits
  Other
Postretirement
Benefits

Service cost

  $34,825     $146     $38,936     $309  

Interest cost

  59,961     5,606     58,545     5,906  

Expected return on plan assets

  (74,846)    (3,516)    (92,827)    (4,093) 

Amortization of prior service cost

  (5,442)    (780)    (5,584)    (779) 

Recognized net actuarial loss

  60,469     9,296     11,113     6,374  
               

Net periodic benefit cost

          $74,967     $10,752             $10,183     $7,717  
               

Note 12 - 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 or credit 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 freestanding 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/(Loss) depending upon the use and designation of the derivatives.

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 June 30, 2009, net derivative asset positions to which the Company was exposed to risk of its counterparties were $2.5 billion, representing the net of $3.0 billion in net derivative gains by counterparty, netted by counterparty where formal netting arrangements exist, adjusted for collateral of $0.5 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 $20.9 million and $23.1 million as of June 30, 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 $1.3 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 June 30, 2009 the Bank carried long-term senior debt ratings of A-/A2 from two of the major ratings agencies. 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 $22.5 million at June 30, 2009, against which the Bank had posted collateral of approximately $9.2 million; ATEs do not exist at lower ratings levels. At June 30, 2009, approximately $1.3 billion in fair value of derivative liabilities are subject to CSAs, against which the Bank has posted approximately $1.2 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 $586.0 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 $24.4 million. 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 market factors, such as 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 presents the Company’s derivative positions at June 30, 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 June 30, 2009. 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. 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.

 

    

Asset Derivatives

   Liability Derivatives  
(Dollars in thousands)   

Balance Sheet
Classification

   Notional
Amounts
         Fair
Value
   Balance Sheet
Classification
   Notional
Amounts
         Fair
Value
 

Derivatives designated in cash flow hedging relationships under SFAS No. 1336

  

Equity contracts hedging:

  

Securities available for sale

   Trading assets    $1,546,752      $121,164       $1,546,752      $-     

Interest rate contracts hedging:

                     

Floating rate loans

   Trading assets    10,000,000      832,853    Trading liabilities    3,000,000      56,336   

Floating rate certificates of deposits

      -           -         Trading liabilities    500,000      13,280   
                               

Total

      11,546,752      954,017       5,046,752      69,616   
                               

Derivatives not designated as hedging instruments under SFAS No. 1337

  

Interest rate contracts covering:

                     

Fixed rate debt

   Trading assets    $3,223,085      $213,128    Trading liabilities    $295,000      $13,245   

Corporate bonds and loans

      -           -         Trading liabilities    67,411      6,889   

MSRs

   Other assets    12,365,000      177,829    Other liabilities    12,795,000      207,202   

LHFS, IRLCs, LHFI-FV3

   Other assets    11,961,500    4      105,625    Other liabilities    7,318,080      83,375   

Trading activity

   Trading assets    107,470,539    1      3,472,369    Trading liabilities    100,602,757      3,312,699   

 

Foreign exchange rate contracts covering:

                     

Foreign-denominated debt and commercial loans

   Trading assets    1,183,361      76,986    Trading liabilities    693,092      132,167   

Trading activity

   Trading assets    2,672,818      164,021    Trading liabilities    2,532,755      144,885   

Credit contracts covering:

                     

Loans

   Trading assets    270,000      8,277    Trading liabilities    120,750      2,434   

Trading activity

   Trading assets    219,484    2      20,357    Trading liabilities    162,273    2      15,101   

 

Equity contracts - Trading activity

   Trading assets    3,900,126    1      415,876    Trading liabilities    7,063,954      499,511   

Other contracts:

                     

IRLCs and other

   Other assets    4,453,844      45,378    Other liabilities    2,065,960    5      64,658   5 

Trading activity

   Trading assets    41,834      6,371    Trading liabilities    30,800      6,206   
                               

Total

      147,761,591      4,706,217       133,747,832      4,488,372   
                               

Total derivatives

      $159,308,343      $5,660,234       $138,794,584      $4,557,988   
                               

1 Amounts include $19.7 billion and $219.1 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 $9.3 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 invesent carried at fair value, respectively.

4 Amount includes $1.7 billion of notional amounts related to interest rate futures. These futures contracts settle in cash daily and therefore no derivative asset or liability is recorded.

5 Includes a $50.5 million derivative liability recorded in other liabilities in the Consolidated Balance Sheets, related to a notional amount of $134.3 million. This derivative was established upon the sale of Visa Class B shares in the second quarter of 2009 as discussed in Note 13, “Reinsurance Arrangements and Guarantees”, to the Consolidated Financial Statements.

6 See “Cash Flow Hedges” beginning on page 28 for further discussion.

7 See “Economic Hedging and Trading Activities” beginning on page 29 for further discussion.

The impacts of derivative financial instruments on the Consolidated Statements of Income/(Loss) and the Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 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.

 

    Three Months Ended June 30, 2009

(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:

     

Securities available for sale

  ($142,501)     $-  

Interest rate contracts hedging:

     

Floating rate loans

  (260,806)   Interest and fees on loans   114,956

Floating rate certificates of deposits

  (672)   Interest on deposits   (22,239)
         

Total

  ($403,979)     $92,717
         
    Six Months Ended June 30, 2009

(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:

     

Securities available for sale

  ($132,519)     $-  

Interest rate contracts hedging:

     

Floating rate loans

  (207,757)  

Interest and fees on loans

  223,987

Floating rate certificates of deposits

  (1,494)  

Interest on deposits

  (45,227)

Floating rate debt

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

Total

  ($341,784)     $177,427
         

 

(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 for the three
months ended June 30, 2009
  Amount of gain/(loss)
Recognized in Income on
Derivatives for the six months
ended June 30, 2009
     

Interest rate contracts covering:

     

Fixed rate public debt

  Trading account profits and commissions   ($73,870)   ($101,814)

Corporate bond holdings and loans

  Trading account profits and commissions   5,080   7,485

MSRs

  Mortgage servicing income   (139,787)   (78,576)

LHFS, IRLCs, LHFI-FV

  Mortgage production income   96,450   (10,181)

Trading activity

  Trading account profits and commissions   (6,307)   4,889

Foreign exchange rate contracts covering:

     

Foreign-denominated debt and commercial loans

  Trading account profits and commissions   140,387   61,647

Trading activity

  Trading account profits and commissions   (34,265)   695

Credit contracts covering:

     

Loans

  Trading account profits and commissions   (6,865)   (9,626)

Other

  Trading account profits and commissions   (5,211)   (3,600)

Equity contracts - trading activity

  Trading account profits and commissions   8,731   48,686

Other contracts:

     

IRLCs

  Mortgage production income   66,238   343,860

Trading activity

  Trading account profits and commissions   892   925
         

Total

    $51,473   $264,390
         

1 During the three and six months ended June 30, 2009, the Company reclassified $7.8 million and $16.3 million, respectively, 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 de-designated.

Credit Derivatives

As part of its trading businesses, the Company enters into contracts that are, in form or substance, written guarantees: specifically, credit default swaps (“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 writes CDS, which 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 June 30, 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 June 30, 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 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 June 30, 2009, the written CDS had remaining terms of approximately three months to six years. The maximum guarantees outstanding at June 30, 2009 and December 31, 2008, as measured by the gross notional amounts of written CDS, were $155.8 million and $190.8 million, respectively. At June 30, 2009 and December 31, 2008, the gross notional amounts of purchased CDS contracts, which represent benefits to, rather than obligations of, the Company, were $209.6 million and $245.2 million, respectively. The fair values of the written CDS were $13.2 million and $34.7 million at June 30, 2009 and December 31, 2008, respectively, and the fair values of the purchased CDS were $18.4 million and $45.8 million at June 30, 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. The obligors are all corporations or partnerships. However, the Company continues to monitor the creditworthiness of its obligors and the likelihood of payment could change at any time due to unforeseen circumstances. Further, during 2009 and 2008, the Company did not make any payments under its written swap participations. At June 30, 2009, the remaining terms on these swap participations generally ranged from three months to nine years, with a weighted average on the maximum estimated exposure of 3.2 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 $166.5 million and $125.7 million at June 30, 2009 and December 31, 2008, respectively. The fair values of the written swap participations were de minimis at June 30, 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. 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 June 30, 2009 and December 31, 2008, the Company had outstanding $2.1 million and $602.1 million, respectively, of outstanding and offsetting TRS notional balances. The fair values of the TRS derivative liabilities were $1.9 million and $166.6 million at June 30, 2009 and December 31, 2008, respectively. The fair values of the offsetting TRS derivative assets at June 30, 2009 and December 31, 2008 were $2.0 million and $171.0 million, respectively, and related collateral held at June 30, 2009 and December 31, 2008 was $7.7 million and $296.8 million, respectively. All remaining positions have been liquidated subsequent to June 30, 2009. As of December 31, 2008, the Company had decided to temporarily suspend its TRS business and the Company has been unwinding its existing positions during 2009. The Company did not incur any losses on these unwinds.

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 June 30, 2009, the Company’s only outstanding SFAS No. 133 interest rate hedging relationships relate to interest rate swaps 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 and certificates of deposit. The maximum range of hedge maturities for hedges of floating rate loans is approximately two to six years, with the weighted average being approximately 4.0 years. The maximum term and weighted average maturity for hedges of certificates of deposit is less than one month. Ineffectiveness on these hedges was de minimis during the three and six months ended June 30, 2009. As of June 30, 2009, $291.3 million, net of tax, of the deferred net gains on derivatives that are recorded in AOCI are expected to be reclassified to net interest income over the next twelve months in connection with the recognition of interest income or interest expense on these hedged items.

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 recorded in AOCI and any ineffective portions recorded in trading account profits and commissions. 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, but did recognize $4.1 million of ineffectiveness during the first six months of 2009, which was recorded in trading account profits and commissions. Other than potential measured hedge ineffectiveness, no amounts will be reclassified from AOCI over the next twelve months and any remaining amounts recorded in AOCI 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.

 

  o

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.

 

 

  o

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.

 

  o

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 receive either euros or pound sterling and pay U.S. dollars. Interest expense on the Consolidated Statements of Income/(Loss) reflects only the contractual interest rate on the debt based on the average spot exchange rate during the applicable period, while fair value changes on the derivatives and valuation adjustments on the debt under SFAS No. 52 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, 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 13 – 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 June 30, 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 June 30, 2009, the total loss exposure ceded to the Company was approximately $661.0 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 $278.4 million. Of this amount, $274.0 million of losses have been reserved for as of June 30, 2009, reducing the Company’s net remaining loss exposure to $4.4 million. Future reported losses may exceed $4.4 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 $4.4 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; future premium income could be further curtailed to the extent the Company agrees to relinquish control of individual trusts to the mortgage insurance companies. Premium income, which totaled $25.9 million and $32.1 million for the six month periods ended June 30, 2009 and June 30, 2008, respectively, are reported as part of noninterest income. The related provision for losses, which total $94.6 million and $32.0 million for the six month periods ended June 30, 2009 and June 30, 2008, respectively, is reported as part of noninterest expense.

As noted above, the reserve for estimated losses incurred under its reinsurance contracts totaled $274.0 million at June 30, 2009. The Company’s evaluation of the required reserve amount includes an estimate of claims to be paid by the trust related to loans in default and an 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 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 June 30, 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 12, “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 (“Class B shares”) to its financial institution members, including 3.2 million shares to the Company, in contemplation of an initial public offering (“IPO”), which occurred in March 2008. For purposes of converting Class B shares to Class A shares of Visa Inc., a conversion factor is applied, which is subject to adjustment depending on the outcome of certain specifically defined litigation. The Class B shares are not transferable (other than to another member bank) until the later of the third anniversary of the IPO closing, or the date which certain specifically defined litigation has been resolved; therefore, the Company’s Class B shares were classified in other assets and accounted for at their carryover basis of $0.

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. During 2008, Visa funded $4.1 billion into an escrow account, established for the purpose of funding judgments in, or settlements of, the Litigation. Agreements associated with the Visa IPO have provisions that Visa will first use the funds in the escrow account to pay for future settlements of, or judgments in the Litigation. If the escrow account is insufficient to cover the Litigation losses, then Visa will issue additional Class A shares (“loss shares”). The proceeds from the sale of the loss shares would then be deposited in the escrow account. The issuance of the loss shares will cause a dilution of the Class B common stock as a result of an adjustment to lower the conversion factor of the Class B common stock to Class A common stock. Visa USA’s members are responsible for any portion of the settlement or loss on the Litigation after the escrow account is depleted and the value of the Class B shares is fully-diluted. As a result of its indemnification obligations and percentage ownership of Class B shares, the Company estimated its net guarantee liability to be $43.5 million as of December 31, 2008. During the second quarter, the Company was notified by Visa of the scheduled recalculation of its membership proportion.

In May 2009, the Company sold its 3.2 million shares of Class B Visa Inc. common stock to another financial institution (“the Counterparty”) for $112.1 million and recognized a gain of $112.1 million. Additionally, the Company entered into a derivative with the Counterparty whereby the Counterparty will be compensated by the Company for any decline in the conversion factor as a result of the outcome of the Litigation. Conversely, the Company will be compensated by the Counterparty for any increase in the conversion factor. Accordingly, the Company recorded a derivative liability at its estimated fair value for $50.5 million. The Counterparty, as a result of its ownership of the Class B common stock, will be impacted by dilutive adjustments to the conversion factor of the Class B common stock caused by the Litigation losses. Since the Company transferred risk associated with the Litigation losses to a different responsible party, the Company recorded an offset to its net guarantee liability. A high degree of subjectivity was used in estimating the fair value of the derivative liability, and the ultimate cost to the Company could be significantly higher or lower than the $50.5 million recorded as of June 30, 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 June 30, 2009 and December 31, 2008, the maximum potential amount of the Company’s obligation was $9.7 billion and $13.8 billion, respectively, for financial and performance standby letters of credit. The Company has recorded $92.8 million and $141.9 million in other liabilities for unearned fees related to these letters of credit as of June 30, 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 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’s risk of repurchasing loans is largely driven by borrower payment performance under the terms of the mortgage loans.

STM maintains a liability for estimated losses on mortgage loans and MSRs that may be repurchased. In accordance with FIN 45, this liability is initially based on the estimated fair value of the Company’s contingency at the time loans or MSRs are sold and the contingent liability is created. Subsequently, STM estimates losses that have been incurred in accordance with SFAS No. 5 and increases the liability if estimated incurred losses exceed the liability established in accordance with FIN 45. As of June 30, 2009 and December 31, 2008, the liability for losses related to repurchases totaled $98.2 million and $100.5 million, respectively.

Contingent Consideration

The Company has contingent payment obligations related to certain business combination transactions. Payments are calculated using certain post-acquisition performance criteria. Arrangements entered into prior to the effective date of SFAS 141(R), are not recorded as liabilities. Arrangements entered subsequent to the effective date of SFAS 141(R) are recorded as liabilities. The potential obligation associated with these arrangements was approximately $16.1 million and $31.8 million as of June 30, 2009 and December 31, 2008, respectively, of which $3.8 million and $0 million was recorded as liabilities as of June 30, 2009 and December 31, 2008. 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 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 and six month periods ended June 30, 2009 and June 30, 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 June 30, 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 from inception. As of June 30, 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 June 30, 2009 and December 31, 2008, $10.2 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 14 - 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 June 30, 2009, the Company owned $48.3 billion in residential mortgage loans and home equity lines, representing 39.3% of total loans, and an additional $16.2 billion in commitments to extend credit on home equity loans and $12.0 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 June 30, 2009, the Company owned $16.1 billion of interest only loans, primarily with a 10 year interest only period. Approximately $2.2 billion of those loans had combined original loan to value ratios in excess of 80% with no mortgage insurance. Additionally, the Company owned approximately $2.6 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 $739.0 million and $945.8 million as of June 30, 2009 and December 31, 2008, respectively.

Note 15 - 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 June 30, 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.

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 interest rate swaps, pursuant to the provisions of SFAS No. 133. The Company has also elected fair value for specific fixed rate debt issued subsequent to 2006 in which the Company concurrently entered into derivative financial instruments that economically converted the interest rate on the debt from fixed to floating. As of December 31, 2008, the fair value of all such elected fixed rate debt was comprised of $3.7 billion of fixed rate FHLB advances and $3.5 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 measured under the SFAS No. 133 hedge designation. A significant portion 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 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. Total fair value debt at June 30, 2009 was $3.4 billion.

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 hedging 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 June 30, 2009, approximately $238.2 million of trading loans were outstanding.

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 significantly limited or 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 whether significant decreases in the volume and level of activity for the asset or liability have been observed. In determining whether a market is inactive, the Company evaluates such factors as the number of recent transactions in either the primary or secondary markets, whether price quotations are current, the variability of price quotations, the significance of bid/ask spreads, declines in (or the absence of) new issuances and the availability of public information. 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. Where the Company determined that a significant decrease in the volume and level of activity had occurred, the Company was then required to evaluate whether significant adjustments were required to market data to arrive at an exit price in accordance with SFAS No. 157.

Level 3 Instruments

SunTrust used significant unobservable inputs to fair value certain financial and non-financial instruments as of June 30, 2009 and December 31, 2008. The general lack of market liquidity necessitates the use of unobservable inputs in certain cases, as the observability of actual trades and assumptions used by market participants that would otherwise be available to the Company to use as a basis for estimating the fair values of these instruments has diminished. 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 $1.3 billion at June 30, 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 $840.5 million at June 30, 2009.

Level 3 trading assets total approximately $3.0 billion at June 30, 2009, which includes the Coke derivative valued at approximately $121.2 million at June 30, 2009. The remaining level 3 securities, both trading assets and available for sale securities are predominantly CP, 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 where the value of the underlying collateral is not readily observable in the market. The Company has 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 been considered level 3 securities due to the significant decrease in the volume and level of activity in these markets, which has necessitated the use of significant unobservable inputs into the Company’s valuations. ARS are classified 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 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 outputs from its own proprietary models. Although third party price indications have been available for the majority of the securities, the significant decrease in the volume and level of 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 any recent trades it executed, market information received from outside market participants and analysts, and/or changes in the underlying collateral performance. When actual trades are 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 discussed in Note 7, “Certain Transfers of Financial Assets, Mortgage Servicing Rights and Variable Interest Entities, “ to the Consolidated Financial Statements, the Company began to purchase CP from Three Pillars, which is a multi-seller commercial paper conduit with which the Company has certain levels of involvement. This CP has been classified as level 3. The downgrade of Three Pillars’ CP to A-2/P-1 during the three months ended June 30, 2009 caused the volume and level of activity for its CP to significantly decrease. Because of this significant decrease, the observability for identical or similar transactions in the market also significantly decreased.

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 severity. 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. During the second quarter, the Company transferred approximately $272.1 million of level 3 loans from loans held for sale to loans held for investment, as the loans were determined to be unmarketable. Although classified as held for investment, these loans continue to be reported at fair value in accordance with SFAS No. 159 using significant unobservable inputs.

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 Company records MSRs at fair value on both a recurring and non-recurring basis. The fair values of MSRs are determined by projecting cash flows, which are then discounted to estimate an expected fair value. The fair values of MSRs are 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.

Most derivative instruments (see Note 12, “Derivative Financial Instruments” to the Consolidated Financial Statements) are level 1 or level 2 instruments. 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 assets or other liabilities. 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. As such, IRLCs are classified within level 3.

In addition, the equity forward 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 Coke dividend. 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 June 30, 2009 and December 31, 2008, the Agreements’ fair value represented an asset position for the Company of approximately $121.2 million and $249.5 million, respectively.

During the second quarter of 2009, in connection with its sale of Visa Class B shares, the Company entered into a derivative contract whereby the ultimate cash payments received or paid, if any, under the contract are based on the ultimate resolution of litigation involving Visa. The value of the derivative was estimated based on the Company’s expectations regarding the ultimate resolution of that litigation, which involved a high degree of judgment and subjectivity, thereby, the value of the derivative liability was classified as a level 3 instrument. See Note 13, “Reinsurance Arrangements and Guarantees”, to the Consolidated Financial Statements for further discussion.

As disclosed in the tabular level 3 rollforwards, during the six months ended June 30, 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. In addition, the Company transferred certain trading securities and long-term debt out of level 3. Available for sale securities that were transferred into level 3 consist of municipal bonds for which no observable trading activity exists. The U.S. Treasury and federal agency trading securities that were transferred out of level 3 were Small Business Administration securities for which the volume and level of observable trading activity had significantly decreased in prior quarters, but for which the Company began to observe limited increases in such activity during the three months ended March 31, 2009 and significant increases in such activity during the three months ended June 30, 2009. This level of activity provided the Company with sufficient market evidence of pricing, such that the Company did not have to make any significant adjustments to observed pricing, nor was the Company’s pricing based on unobservable data. The Company also elected to transfer its fixed rate debt out of level 3 during the three months ended June 30, 2009. The volume and level of activity for transactions in the Company’s debt in the secondary markets had begun to increase in the three months ended March 31, 2009 and significantly increased during the three months ended June 30, 2009. As such, the Company was able to use pricing from observable trades to corroborate pricing received from third-party pricing services and market-makers. 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. None of the transfers into or out of level 3 were the result of using alternative valuation approaches to estimate fair values.

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, and/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 and six months ended June 30, 2009, SunTrust recognized a gain on loans accounted for at fair value of approximately $10.0 million and a gain of approximately $1.3 million, respectively, due to changes in fair value attributable to borrower-specific credit risk. For the three and six months ended June 30, 2008, SunTrust recognized a loss on loans accounted for at fair value of approximately $1.6 million and $16.8 million, respectively, due to changes in fair value attributable to borrower-specific credit risk. 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. Based on U.S. Treasury rates, the Company recognized a loss of approximately $102.1 million and $5.1 million, respectively, for the three and six months ended June 30, 2009, and a loss of approximately $61.1 million and a gain of approximately $151.4 million, for the three and six months ended June 30, 2008, respectively, due to changes in its own credit spread on its public debt as well as its brokered deposits.

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 market-related risks 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 or servicing 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.

 

(Dollars in thousands)   Assets/Liabilities   Fair Value Measurements at
June 30, 2009,
Using
    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

       

U.S. Treasury and federal agencies

  $1,012,644   $195,722   $816,922   $-

U.S. states and political subdivisions

  94,498   -     87,097   7,401

Corporate debt securities

  450,681   -     450,681   -  

Commercial paper

  2,436,291   -     23,883   2,412,408

Residential mortgage-backed securities-agency

  119,873   -     119,873   -  

Residential mortgage-backed securities-private

  21,140   -     -     21,140

Collateralized debt obligations

  232,067   -     -     232,067

Other debt securities

  41,127   -     17,574   23,553

Equity securities

  174,674   2,403   8,921   163,350

Derivative contracts

  3,047,454   106,307   2,819,983   121,164

Other

  108,748   -     94,657   14,091
               

Total trading assets

  7,739,197   304,432   4,439,591   2,995,174
               

Securities available for sale

       

U.S. Treasury and federal agencies

  579,910   191,249   388,661   -  

U.S. states and political subdivisions

  1,004,192   -     867,550   136,642

Residential mortgage-backed securities-agency

  14,386,416   -     14,386,416   -  

Residential mortgage-backed securities-private

  439,920   -     -     439,920

Other debt securities

  619,157   -     555,792   63,365

Common stock of The Coca-Cola Company

  1,439,700   1,439,700   -     -  

Other equity securities

  995,996   161   291,011   704,824
               

Total securities available for sale

  19,465,291   1,631,110   16,489,430   1,344,751
               

Loans held for sale

  6,604,312   -     6,446,331   157,981

Loans

  494,669   -     -     494,669

Other intangible assets 2

  641,939   -     -     641,939

Other assets 1

  195,726   5,195   145,153   45,378

Liabilities

       

Brokered deposits

  1,093,017   -     1,093,017   -  

Trading liabilities

  2,348,851   338,915   2,009,936   -  

Long-term debt

  3,365,649   -     3,365,649   -  

Other liabilities 1

  222,129   -     157,471   64,658

1 This amount includes IRLCs and derivative financial instruments entered into by the Household Lending line of business to hedge its interest rate risk along with a derivative associated with the Company’s sale of Visa shares during the quarter ended June 30, 2009.

2 This amount includes MSRs carried at fair value.

   

Fair Value Gain/(Loss) for the Three Months Ended
June 30, 2009, for Items Measured at Fair Value Pursuant

to Election of the Fair Value Option

    Fair Value Gain/(Loss) for the Six Months Ended
June 30, 2009, 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 2
  Mortgage
Servicing
Related
Income
  Total
Changes in
Fair Values
Included in
Current-
Period
Earnings1
 

Assets

                   

Trading assets

  $3,403   $-   $-     $3,403      $3,248   $-   $-   $3,248

Loans held for sale

  -   139,944   -     139,944      -   427,141    -   427,141

Loans

  1,376   2,388   -     3,764      3,235   (2,741)   -   494

Other intangible assets

  -   2,890   100,208     103,098      -   7,461    74,410   81,871
 

Liabilities

                   

Brokered deposits

  2,467   -   -     2,467      19,919   -   -   19,919

Long-term debt

  (13,249)   -   -     (13,249   155,417   -   -   155,417

1 Changes in fair value for the three and six month periods ended June 30, 2009, 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/(Loss) 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 three and six month periods ended June 30, 2009, income related to loans held for sale, net includes $230.5 million and $372.3 million, respectively, related to MSRs recognized upon the sale of loans reported at fair value. For the three and six months ended June 30, 2009, income related to other intangible assets includes $2.9 million and $7.5 million, respectively, 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.

        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

       

U.S. Treasury and federal agencies

  $3,127,636   $142,906   $2,339,470   $645,260

U.S. states and political subdivisions

  159,135   -     151,809   7,326

Corporate debt securities

  585,809   -     579,159   6,650

Commercial paper

  399,611   -     399,611   -  

Residential mortgage-backed securities-agencies

  58,565   -     58,565   -  

Residential mortgage-backed securities-private

  37,970   -     -     37,970

Collateralized debt obligations

  261,528   -     -     261,528

Other debt securities

  813,176   -     790,231   22,945

Equity securities

  116,788   6,415   8,409   101,964

Derivative contracts

  4,701,783   -     4,452,236   249,547

Other

  134,269   -     76,074   58,195
               

Total trading assets

  10,396,270   149,321   8,855,564   1,391,385
               

Securities available for sale

       

U.S. Treasury and federal agencies

  486,153   127,123   359,030   -  

U.S. states and political subdivisions

  1,037,429   -     958,167   79,262

Non-U.S. government debt securities

  -     -     -     -  

Residential mortgage-backed securities - agencies

  14,550,104   -     14,550,104   -  

Residential mortgage-backed securities - private

  522,151   -     -     522,151

Other debt securities

  294,185   -     265,772   28,413

Common stock of The Coca-Cola Company

  1,358,100   1,358,100   -     -  

Other equity securities

  1,448,415   141   588,495   859,779
               

Total securities available for sale

  19,696,537   1,485,364   16,721,568   1,489,605
               

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
June 30, 2008, for Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
  Fair Value Gain/(Loss) for the Six Months Ended
June 30, 2008, for Items Measured at Fair Value Pursuant
to Election of the Fair Value Option

(Dollars in thousands)

Assets

  Trading Account
Profits and
Commissions
  Mortgage
Production
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

 

Trading assets

 

 

$4,392  

 

 

$-      

 

  

 

 

$4,392 

 

 

$834  

 

 

$-      

 

  

 

 

$834  

 

Loans held for sale

 

 

-  

 

 

44,886

 

 2 

 

 

44,886 

 

 

-  

 

 

117,985

 

 2 

 

 

117,985  

 

Loans

 

 

-  

 

 

(4,620)

 

  

 

 

(4,620)

 

 

-  

 

 

(13,704)

 

  

 

 

(13,704) 

 

Liabilities

             

 

Brokered deposits

  15,832     -      15,832    12,242     -      12,242  

 

Long-term debt

 

 

177,304 

 

 

-

 

  

 

 

177,304 

 

 

163,754  

 

 

-

 

  

 

 

163,754  

 

1 Changes in fair value for the three and six months ended June 30, 2008 exclude accrued interest for the period 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/(Loss) 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 three and six months ended June 30, 2008, these amounts include $139.8 million and $287.5 million, respectively, related to MSR assets recognized upon the sale of the loans. These amounts exclude $6.2 million and $10.7 million for the three and six months ended June 30, 2008, respectively, of MSRs recognized upon sale of loans reported at the lower of cost or market value. These MSRs are excluded from the table because neither the loans nor the related MSRs were reported at fair value on a recurring basis.

  

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 it include information related to the goodwill impairment charge recorded during the six months ended June 30, 2009 which is discussed in Note 6, “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
June 30, 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

   $1,091,763      $-    $965,974      $125,789      ($60,502) 

 

MSRs 2

  

 

68,094  

  

 

-

  

 

-  

  

 

68,094  

  

 

(17,671) 

 

OREO 3

  

 

588,922  

  

 

-

  

 

588,922  

  

 

-  

  

 

(67,570) 

 

Affordable Housing 3

  

 

7,486  

  

 

-

  

 

-  

  

 

7,486  

  

 

-  

 

Loans 4

  

 

56,466  

  

 

-

  

 

56,466  

  

 

-  

  

 

(7,869) 

 

Other Assets 5

  

 

85,317  

  

 

-

  

 

-  

  

 

85,317  

  

 

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 $0.9 million impairment charge recorded during the six months ended June 30, 2009.

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.

5 These balances are measured at fair value on a non-recurring basis in accordance with APB No. 18 and SFAS No. 144. These assets include equity partner investments, structured leasing products and other repossessed assets. These assets were impacted by $34.0 million in impairment charges recorded during the six months ended June 30, 2009.

  

 

(Dollars in thousands)         Fair Value Measurement at
December 31, 2008,
Using
    
   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.

  

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 6, “Goodwill and Other Intangible Assets”, to the Consolidated Financial Statements):

    Fair Value Measurements
Using Significant Unobservable Inputs
(Dollars in thousands)   Beginning balance
April 1, 2009
   Included in
earnings
      Other
comprehensive
income
    Purchases,
sales,
issuances,
settlements,
maturities
paydowns, net
  Transfers
to/from other
balance sheet

line items
  Level 3
transfers, net
  Fair value
June 30, 2009
  Change in unrealized gains/
(losses) included in earnings
for the three months

ended June 30, 2009
related to financial
assets still held
at June 30, 2009
   

Assets

                    

 

Trading assets

                    

U.S. Treasury and federal agencies

  592,922      (2,798)   1   -            (129,239)   -         (460,885)    -         -         1

U.S. states and political subdivisions

  7,401      -         1,5   -            -         -         -         7,401    -         1

Corporate debt securities

  6,650      2,800    1   -            (9,450)   -         -         -         -         1

Commercial paper

  -          -         1   -            2,412,408    -         -         2,412,408    -         1

Residential mortgage-backed securities - private

  26,221      2,493    1   -            (7,574)   -         -         21,140    (488)    1

Collateralized debt obligations

  246,423      4,805    1, 5   -            (19,161)   -         -         232,067    4,601    1

Other debt securities

  23,722      231    1, 5   -            (400)   -         -         23,553    -         1

Equity securities

  170,694      3,247    1, 5   -            (10,591)   -         -         163,350    1,856    1

Derivative contracts

  259,529      4,136    1   (142,501)  6    -         -         -         121,164    -         1

Other

  42,660      (1,726)   1   -            (2,030)   -         (24,813)   14,091    (336)   1
                                      

Total trading assets

  1,376,222      13,188    1, 5   (142,501)      2,233,963    -         (485,698)   2,995,174    5,633    1

 

Securities available for sale

                    

U.S. states and political subdivisions

  140,527      80    2, 5   (920)      (3,045)   -         -         136,642    -         2

Residential mortgage-backed securities - private

  474,885      (5,527)   2   6,905      (36,343)   -         -         439,920    (5,527)   2

Other debt securities

  63,487      198    2, 5   946      (1,266)   -         -         63,365    -         2

Other equity securities

  704,847      (212)   2   (261)      450    -         -         704,824    (212)   2
                                      

Total securities available for sale

  1,383,746      (5,461)    2, 5   6,670      (40,204)   -         -         1,344,751    (5,739)   2

Loans held for sale

  452,890      656    3   -            (27,516)   (274,189)   6,140    157,981    (1,362)   3

Loans

  242,193      4,488    4   -            (17,686)   269,215    (3,541)   494,669    (791)   4

Other assets/liabilities, net

  106,227      66,238    3   -            (50,461)   (141,284)   -         (19,280)    (19,280)   3

 

Liabilities

                    

Long-term debt

  (3,352,400)    (13,249)    1   -            -         -         3,365,649    -         (13,249)    1
    Beginning balance
January 1, 2009
   Included in
earnings
      Other
comprehensive
income
    Purchases,
sales,
issuances,
settlements,
maturities
paydowns, net
  Transfers
to/from other
balance sheet

line items
  Level 3
transfers, net
  Fair value
June 30, 2009
  Change in unrealized gains/
(losses) included in earnings
for the six months

ended June 30, 2009
related to financial
assets still held
at June 30, 2009
   

Assets

                    

Trading assets

                    

U.S. Treasury and federal agencies

  645,260      (4,863)   1   -            (181,153)    -         (459,244)   -         -         1

U.S. states and political subdivisions

  7,326      (325)   1, 5   -            400    -         -         7,401    (324)    1

Corporate debt securities

  6,650      2,800    1   -            (9,450)    -         -         -         -         1

Commercial paper

  -          -         1   -            2,412,408    -         -         2,412,408