SUNTRUST BANKS INC, 10-Q filed on 8/6/2010
Quarterly Report
Document and Entity Information
Jul. 29, 2010
6 Months Ended
Jun. 30, 2010
Document Type
 
10-Q 
Amendment Flag
 
FALSE 
Document Period End Date
 
06/30/2010 
Document Fiscal Year Focus
 
2010 
Document Fiscal Period Focus
 
Q2 
Trading Symbol
 
STI 
Entity Registrant Name
 
SUNTRUST BANKS INC 
Entity Central Index Key
 
0000750556 
Current Fiscal Year End Date
 
12/31 
Entity Filer Category
 
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
499,934,095 
 
Consolidated Statements of Income/(Loss) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30, 2010
6 Months Ended
Jun. 30, 2010
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
Interest Income
 
 
 
 
Interest and fees on loans
$ 1,317,707 
$ 2,634,463 
$ 1,397,045 
$ 2,809,930 
Interest and fees on loans held for sale
33,146 
66,323 
72,406 
134,238 
Interest and dividends on securities available for sale
 
 
 
 
Taxable interest
167,463 
343,365 
168,659 
349,861 
Tax-exempt interest
8,506 
17,434 
10,018 
20,717 
Dividends
18,970 1
37,929 1
18,066 1
36,228 1
Interest on funds sold and securities purchased under agreements to resell
280 
525 
558 
1,495 
Interest on deposits in other banks
11 
29 
63 
176 
Trading account interest
24,310 
44,011 
26,459 
69,964 
Total interest income
1,570,393 
3,144,079 
1,693,274 
3,422,609 
Interest Expense
 
 
 
 
Interest on deposits
225,199 
458,244 
398,903 
822,776 
Interest on funds purchased and securities sold under agreements to repurchase
1,520 
2,612 
2,441 
5,174 
Interest on trading liabilities
8,141 
14,276 
4,917 
11,077 
Interest on other short-term borrowings
3,021 
6,215 
3,593 
8,748 
Interest on long-term debt
154,382 
313,165 
193,763 
423,079 
Total interest expense
392,263 
794,512 
603,617 
1,270,854 
Net interest income
1,178,130 
2,349,567 
1,089,657 
2,151,755 
Provision for credit losses
662,064 4
1,523,673 4
962,181 4
1,956,279 4
Net interest income after provision for credit losses
516,066 
825,894 
127,476 
195,476 
Noninterest Income
 
 
 
 
Service charges on deposit accounts
207,765 
403,667 
210,224 
416,618 
Card fees
94,306 
181,240 
80,505 
156,165 
Other charges and fees
133,379 
262,479 
127,799 
252,120 
Trust and investment management income
127,222 
249,309 
117,007 
233,017 
Retail investment services
48,626 
95,366 
55,400 
112,113 
Mortgage production related income/(loss)
(16,462)
(47,391)
165,388 
415,858 
Mortgage servicing related income
87,544 
158,048 
139,658 
223,010 
Investment banking income
57,875 
113,791 
77,038 
136,572 
Trading account profits/(losses) and commissions
108,738 
101,470 
(30,020)
77,273 
Gain from ownership in Visa
 
 
112,102 
112,102 
Other noninterest income
46,035 
73,666 
41,473 
79,587 
Net securities gains/(losses)
56,971 2
58,514 2
(24,899)2
(21,522)2
Total noninterest income
951,999 
1,650,159 
1,071,675 
2,192,913 
Noninterest Expense
 
 
 
 
Employee compensation
575,420 
1,131,918 
569,228 
1,142,250 
Employee benefits
107,063 
242,358 
134,481 
297,511 
Outside processing and software
157,764 
306,467 
145,359 
283,720 
Net occupancy expense
89,927 
181,068 
87,220 
174,637 
Regulatory assessments
65,029 
129,364 
148,675 
196,148 
Credit and collection services
65,550 
139,340 
66,269 
114,187 
Other real estate expense
86,464 
132,472 
49,036 
93,408 
Equipment expense
42,366 
82,879 
43,792 
87,332 
Marketing and customer development
43,958 
78,085 
30,264 
64,989 
Operating losses
16,106 
29,903 
32,570 
55,191 
Amortization/impairment of goodwill/intangible assets
13,172 
26,359 
13,955 
780,971 
Mortgage reinsurance
8,780 
18,180 
24,581 
94,620 
Net loss on debt extinguishment
63,423 
54,116 
38,864 
13,560 
Visa litigation
 
 
7,000 
7,000 
Other noninterest expense
167,727 
310,783 
136,678 
274,471 
Total noninterest expense
1,502,749 
2,863,292 
1,527,972 
3,679,995 
Loss before benefit for income taxes
(34,684)
(387,239)
(328,821)
(1,291,606)
Benefit for income taxes
(49,764)
(243,926)
(148,957)
(299,734)
Net income/(loss) including income attributable to noncontrolling interest
15,080 
(143,313)
(179,864)
(991,872)
Net income attributable to noncontrolling interest
2,696 
5,117 
3,596 
6,755 
Net income/(loss)
12,384 
(148,430)
(183,460)
(998,627)
Net loss available to common shareholders
(56,109)
(285,293)
(164,428)
(1,039,809)
Net income/(loss) per average common share
 
 
 
 
Diluted
(0.11)
(0.58)
(0.41)
(2.77)
Basic
(0.11)
(0.58)
(0.41)
(2.77)
Dividends declared per common share
0.01 
0.02 
0.10 
0.20 
Average common shares - diluted
498,499 3
498,369 3
400,633 3
376,400 3
Average common shares - basic
495,351 
495,112 
399,242 
375,429 
Consolidated Statements of Income/(Loss) (Parenthetical) (USD $)
In Thousands
3 Months Ended
Jun. 30, 2010
6 Months Ended
Jun. 30, 2010
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
Dividends on common stock of The Coca-Cola Company
$ 13,200 
$ 26,400 
$ 12,300 
$ 24,600 
Net impairment losses recognized in earnings
798 
1,860 
5,740 
6,461 
Total OTTI losses
798 2
1,860 2
8,567 2
9,288 2
Portion of losses recognized in OCI (before taxes)
 
 
$ 2,827 1
$ 2,827 1
Consolidated Balance Sheets (USD $)
In Thousands, except Share data
Jun. 30, 2010
Dec. 31, 2009
Assets
 
 
Cash and due from banks
$ 3,835,943 
$ 6,456,406 
Interest-bearing deposits in other banks
24,463 
24,109 
Funds sold and securities purchased under agreements to resell
932,769 
516,656 
Cash and cash equivalents
4,793,175 
6,997,171 
Trading assets
6,165,802 
4,979,938 
Securities available for sale
27,598,360 
28,477,042 
Loans held for sale (loans at fair value: $2,524,470 as of June 30, 2010; $2,923,375 as of December 31, 2009)
3,184,717 1
4,669,823 1
Loans (loans at fair value: $410,870 as of June 30, 2010; $448,720 as of December 31, 2009)
112,925,417 2
113,674,844 2
Allowance for loan and lease losses
(3,156,000)
(3,120,000)
Net loans
109,769,417 
110,554,844 
Premises and equipment
1,547,294 
1,551,794 
Goodwill
6,323,028 
6,319,078 
Other intangible assets (MSRs at fair value: $1,297,668 as of June 30, 2010; $935,561 as of December 31, 2009)
1,443,227 
1,711,299 
Customers' acceptance liability
10,620 
6,264 
Other real estate owned
699,828 
619,621 
Unsettled sales of securities available for sale
534,512 
 
Other assets
8,598,490 
8,277,861 
Total assets
170,668,470 
174,164,735 
Liabilities and Shareholders' Equity
 
 
Noninterest-bearing consumer and commercial deposits
25,382,113 
24,244,041 
Interest-bearing consumer and commercial deposits
90,879,385 
92,059,411 
Total consumer and commercial deposits
116,261,498 
116,303,452 
Brokered deposits (CDs at fair value: $1,203,858 as of June 30, 2010; $1,260,505 as of December 31, 2009)
2,342,435 
4,231,530 
Foreign deposits
64,170 
1,328,584 
Total deposits
118,668,103 
121,863,566 
Funds purchased
1,260,447 
1,432,581 
Securities sold under agreements to repurchase
2,476,519 
1,870,510 
Other short-term borrowings
2,516,714 
2,062,277 
Long-term debt (debt at fair value: $3,682,630 as of June 30, 2010; $3,585,892 as of December 31, 2009)
15,658,705 3
17,489,516 3
Acceptances outstanding
10,620 
6,264 
Trading liabilities
2,655,092 
2,188,923 
Other liabilities
4,398,376 
4,720,243 
Total liabilities
147,644,576 
151,633,880 
Preferred stock
4,929,357 
4,917,312 
Common stock, $1.00 par value
514,667 
514,667 
Additional paid in capital
8,445,077 
8,521,042 
Retained earnings
8,358,155 
8,562,807 
Treasury stock, at cost, and other
(968,279)
(1,055,136)
Accumulated other comprehensive income, net of tax
1,744,917 
1,070,163 
Total shareholders' equity
23,023,894 
22,530,855 
Total liabilities and shareholders' equity
170,668,470 
174,164,735 
Common shares outstanding
499,928,565 
499,156,858 
Common shares authorized
750,000,000 
750,000,000 
Preferred shares outstanding
50,225 
50,225 
Preferred shares authorized
50,000,000 
50,000,000 
Treasury shares of common stock
14,738,030 
15,509,737 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data
Jun. 30, 2010
Dec. 31, 2009
Loans held for sale, loans at fair value
$ 2,524,470 
$ 2,923,375 
Loans, loans at fair value
410,870 
448,720 
Other intangible assets, MSRs at fair value
1,297,668 
935,561 
Brokered deposits, CDs at fair value
1,203,858 
1,260,505 
Long-term debt, fair value
3,682,630 
3,585,892 
Common stock, par value
1.00 
1.00 
Loans held for sale of consolidated VIEs
3,184,717 1
4,669,823 1
Loans of consolidated VIEs
112,925,417 2
113,674,844 2
Debt of consolidated VIEs
15,658,705 3
17,489,516 3
Variable Interest Entities
 
 
Loans held for sale of consolidated VIEs
301,012 
 
Loans of consolidated VIEs
1,689,873 
 
Debt of consolidated VIEs
$ 280,162 
 
Consolidated Statements of Shareholders' Equity (USD $)
In Thousands
Preferred Stock
Common Shares Outstanding
Common Stock
Additional Paid in Capital
Retained Earnings
Treasury Stock and Other
Other Comprehensive Income
Total
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 (in shares)
 
354,515 
 
 
 
 
 
 
Net 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
 
1,839 
Common stock dividends, $0.02 in 2010 and $0.20 in 2009 per share
 
 
 
 
(72,646)
 
 
(72,646)
Series A preferred dividends
 
 
 
 
(10,635)
 
 
(10,635)
U.S. Treasury preferred stock dividends, $2,500 in 2010 and $2,504 in 2009 per share
 
 
 
 
(121,438)
 
 
(121,438)
Accretion of discount associated with U.S. Treasury preferred stock
11,387 
 
 
 
(11,387)
 
 
 
Issuance of common stock in connection with SCAP capital plan (in shares)
 
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 
Restricted stock activity (in shares)
 
1,676 
 
 
 
 
 
 
Restricted stock activity
 
 
 
(186,168)
 
157,693 1
 
(28,475)
Amortization of restricted stock compensation
 
 
 
 
 
36,277 1
 
36,277 
Issuance of stock for employee benefit plans and other (in shares)
 
727 
 
 
 
 
 
 
Issuance of stock for employee benefit plans and other
 
 
 
(44,140)
(3)
56,859 1
 
12,716 
Fair value election of MSRs
 
 
 
 
 
 
 
 
Adoption of OTTI guidance
 
 
 
 
7,715 
 
(7,715)
 
Ending Balance
4,918,863 
 
514,667 
8,540,036 
9,271,388 
(1,115,782)1
823,986 
22,953,158 
Ending Balance (in shares)
 
498,786 
 
 
 
 
 
 
1/1/2010 - 6/30/2010
 
 
 
 
 
 
 
 
Beginning Balance
4,917,312 
 
514,667 
8,521,042 
8,562,807 
(1,055,136)1
1,070,163 
22,530,855 
Beginning Balance (in shares)
 
499,157 
 
 
 
 
 
 
Net loss
 
 
 
 
(148,430)
 
 
(148,430)
Other comprehensive income:
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) on securities, net of taxes
 
 
 
 
 
 
214,340 
214,340 
Change in unrealized gains (losses) on derivatives, net of taxes
 
 
 
 
 
 
377,261 
377,261 
Change related to employee benefit plans
 
 
 
 
 
 
83,153 
83,153 
Total comprehensive income
 
 
 
 
 
 
 
526,324 
Change in noncontrolling interest
 
 
 
 
 
(2)1
 
(2)
Common stock dividends, $0.02 in 2010 and $0.20 in 2009 per share
 
 
 
 
(9,988)
 
 
(9,988)
Series A preferred dividends
 
 
 
 
(3,488)
 
 
(3,488)
U.S. Treasury preferred stock dividends, $2,500 in 2010 and $2,504 in 2009 per share
 
 
 
 
(121,250)
 
 
(121,250)
Accretion of discount associated with U.S. Treasury preferred stock
12,045 
 
 
 
(12,045)
 
 
 
Issuance of common stock in connection with SCAP capital plan (in shares)
 
 
 
 
 
 
 
 
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
 
 
 
11,298 
 
 
 
11,298 
Restricted stock activity (in shares)
 
461 
 
 
 
 
 
 
Restricted stock activity
 
 
 
(69,531)
 
41,318 1
 
(28,213)
Amortization of restricted stock compensation
 
 
 
 
 
22,221 1
 
22,221 
Issuance of stock for employee benefit plans and other (in shares)
 
311 
 
 
 
 
 
 
Issuance of stock for employee benefit plans and other
 
 
 
(17,732)
1,976 
23,320 1
 
7,564 
Fair value election of MSRs
 
 
 
 
88,995 
 
 
88,995 
Adoption of OTTI guidance
 
 
 
 
(422)
 
 
(422)
Ending Balance
4,929,357 
 
514,667 
8,445,077 
8,358,155 
(968,279)1
1,744,917 
23,023,894 
Ending Balance (in shares)
 
499,929 
 
 
 
 
 
 
Consolidated Statements of Shareholders' Equity (Parenthetical) (USD $)
In Thousands, except Per Share data
6 Months Ended
Jun. 30,
2010
2009
Common stock dividends, per share
$ 0.02 
$ 0.20 
Series A preferred stock dividends, per share
2,022 
2,022 
U.S. Treasury preferred stock dividends, per share
2,500 
2,504 
Treasury Stock and Other
 
 
Ending Balance, treasury stock
(1,021,588)
(1,141,909)
Ending Balance, compensation element of restricted stock
(54,885)
(88,408)
Ending Balance, noncontrolling interest
$ 108,194 
$ 114,535 
Consolidated Statements of Cash Flows (USD $)
In Thousands
6 Months Ended
Jun. 30,
2010
2009
Cash Flows from Operating Activities:
 
 
Net loss including income attributable to noncontrolling interest
$ (143,313)
$ (991,872)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
 
 
Gain from ownership in Visa
 
(112,102)
Depreciation, amortization and accretion
404,254 
476,416 
Goodwill impairment
 
751,156 
MSRs impairment recovery
 
(188,207)
Origination of MSRs
(133,789)
(379,725)
Provisions for credit losses and foreclosed property
1,620,306 
2,030,966 
Amortization of restricted stock compensation
22,221 
36,277 
Stock option compensation
11,298 
8,631 
Excess tax benefits from stock-based compensation
33 
(352)
Net loss on debt extinguishment
54,116 
13,560 
Net securities (gains)/losses
(58,514)1
21,522 1
Net (gain)/loss on sale of assets
4,158 
(29,351)
Net decrease/(increase) in loans held for sale
822,860 
(4,305,295)
Contributions to retirement plans
(3,912)
(18,664)
Net increase in other assets
(407,387)
(6,329)
Net increase/(decrease) in other liabilities
173,441 
(962,058)
Net cash provided by/(used in) operating activities
2,365,772 
(3,655,427)
Cash Flows from Investing Activities:
 
 
Proceeds from maturities, calls and paydowns of securities available for sale
2,801,861 
1,765,339 
Proceeds from sales of securities available for sale
10,525,781 
9,157,424 
Purchases of securities available for sale
(12,677,081)
(13,127,424)
Proceeds from maturities, calls and paydowns of trading securities
78,370 
60,710 
Proceeds from sales of trading securities
60,534 
2,042,528 
Purchases of trading securities
 
(85,965)
Net decrease in loans
30,914 
2,077,223 
Proceeds from sales of loans held for investment
600,014 
499,576 
Capital expenditures
(88,614)
(108,820)
Proceeds from sale/redemption of Visa shares
 
112,102 
Contingent consideration and other payments related to acquisitions
(4,233)
(17,038)
Proceeds from the sale of other assets
349,001 
257,414 
Net cash provided by investing activities
1,676,547 
2,633,069 
Cash Flows from Financing Activities:
 
 
Net (decrease)/increase in total deposits
(3,194,023)
5,028,585 
Assumption of deposits, net
 
445,482 
Net decrease in funds purchased, securities sold under agreements to repurchase, and other short-term borrowings
(1,134,991)
(1,404,478)
Proceeds from the issuance of long-term debt
500,000 
574,560 
Repayment of long-term debt
(2,282,542)
(8,409,350)
Excess tax benefits from stock-based compensation
(33)
352 
Proceeds from the issuance of common stock
 
1,829,167 
Repurchase of preferred stock
 
(219,959)
Common and preferred dividends paid
(134,726)
(201,719)
Net cash used in financing activities
(6,246,315)
(2,357,360)
Net decrease in cash and cash equivalents
(2,203,996)
(3,379,718)
Cash and cash equivalents at beginning of period
6,997,171 
6,637,402 
Cash and cash equivalents at end of period
4,793,175 
3,257,684 
Supplemental Disclosures:
 
 
Loans transferred from loans held for sale to loans
17,222 
297,319 
Loans transferred from loans to loans held for sale
237,522 
 
Loans transferred from loans to other real estate owned
621,929 
383,314 
Accretion on U.S. Treasury preferred stock
12,045 
11,387 
Extinguishment of forward stock purchase contract
 
164,927 
Gain on repurchase of Series A preferred stock
 
89,425 
Total assets of consolidated VIEs at January 1, 2010
$ 2,049,392 
 
Significant Accounting Policies
Significant Accounting Policies

Note 1 – Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with 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.

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.

The Company evaluated subsequent events through the date its financial statements were issued.

These financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2009. 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, 2009.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are considered held for investment. The Company’s loan balance is comprised of loans held in portfolio, including commercial loans, consumer loans, real estate loans and lines, credit card receivables, direct financing leases, leveraged leases, and nonaccrual and restructured loans. Interest income on all types of loans is accrued based upon the outstanding principal amounts, except those classified as nonaccrual loans. The Company typically classifies commercial and commercial real estate loans as nonaccrual when one of the following events occurs: (i) interest or principal has been in default 90 days or more, unless the loan is secured by collateral having realizable value sufficient to discharge the debt in full and the loan is in the legal process of collection; (ii) collection of recorded interest or principal is not anticipated; or (iii) income for the loan is recognized on a cash basis due to the deterioration in the financial condition of the debtor. Consumer and residential mortgage loans are typically placed on nonaccrual when payments have been in default for 90 and 120 days or more, respectively.

When a loan is placed on nonaccrual, unpaid interest is reversed against interest income. Interest income on nonaccrual loans, if recognized, is either recorded using the cash basis method of accounting or recognized at the end of the loan after the principal has been reduced to zero, depending on the type of loan. If and when borrowers demonstrate the ability to repay a loan in accordance with the contractual terms of a loan classified as nonaccrual, the loan may be returned to accrual status. See “Allowance for Loan and Lease Losses” section of this Note for further discussion of impaired loans.

TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower. To date, the Company’s TDRs have been predominantly first and second lien residential mortgages and home equity lines of credit. Prior to modifying a borrower’s loan terms, the Company performs a careful evaluation of the borrower’s financial condition and ability to service the modified loan terms. The types of concessions granted are generally interest rate reductions and/or term extensions. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. See the “Allowance for Loans and Lease Losses” section within this Note for further information regarding these policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower. Consistent with regulatory guidance, upon sustained performance and classification as a TDR over the Company’s year end, the loan will be removed from TDR status as long as the modified terms were market based at the time of modification. Generally, once a single 1-4 family residential related loan becomes a TDR, it is probable that the loan will likely continue to be reported as a TDR until it ultimately pays off.

For loans accounted for at amortized cost, fees and incremental direct costs associated with the loan origination and pricing process, as well as premiums and discounts, are deferred and amortized as level yield adjustments over the respective loan terms. Premiums for purchased credit cards are amortized on a straight-line basis over one year. Fees received for providing loan commitments that result in loans are recognized over the term of the loan as an adjustment of the yield. If a loan is never funded, the commitment fee is recognized into noninterest income at the expiration of the commitment period. Origination fees and costs are recognized in noninterest income and expense at the time of origination, for newly originated loans that are accounted for at fair value.

Allowance for Loan and Lease Losses

The Company’s ALLL is the amount considered adequate to absorb probable losses within the portfolio based on management’s evaluation of the size and current risk characteristics of the loan portfolio. Such evaluation considers numerous factors, including, but not limited to net charge-off trends, internal risk ratings, changes in internal risk ratings, loss forecasts, collateral values, geographic location, borrower FICO scores, delinquency rates, nonperforming and restructured loans, origination channel, product mix, underwriting practices, industry conditions and economic trends.

Specific allowances for loan and lease losses are established for large commercial, corporate, and commercial real estate nonaccrual loans that are evaluated on an individual basis and certain consumer, commercial, corporate, and commercial real estate loans whose terms have been modified in a TDR. The specific allowance established for these loans and leases is based on a thorough analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair value of the underlying collateral depending on the most likely source of repayment.

General allowances are established for loans and leases grouped into pools based on similar characteristics. In this process, general allowance factors are based on an analysis of historical charge-off experience, portfolio trends, regional and national economic conditions, and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the ALLL after an assessment of internal and external influences on credit quality that are not fully reflected in the historical loss or other risk rating data.

The Company’s charge-off policy meets or is more stringent than regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due compared to the regulatory loss criteria of 120 days past due. Secured consumer loans, including residential real estate, are typically charged-off between 120 and 180 days past due, depending on the collateral type, in compliance with the FFIEC guidelines. Loans that have been partially charged-off remain on nonperforming status, regardless of collateral value, until specific borrower performance criteria are met.

The Company uses numerous sources of information in order to make an appropriate evaluation of a property’s value. Estimated collateral valuations are based on appraisals, broker price opinions, recent sales of foreclosed properties, automated valuation models, other property specific information, and relevant market information, supplemented by the Company’s internal property valuation professionals. The value estimate is based on an orderly disposition and marketing period of the property. In limited instances, the Company adjusts appraisals for justifiable and well-supported reasons, such as an appraiser not being aware of certain property- specific factors or recent sales information. Appraisals generally represent the “as is” value of the property but may be adjusted based on the intended disposition strategy of the property.

For commercial real estate loans secured by property, an acceptable appraisal or other form of evaluation is obtained prior to the origination of the loan. Updated evaluations of the collateral’s value are obtained at least annually, or earlier if the credit quality of the loan deteriorates. In situations where an updated appraisal has not been received or a formal evaluation performed, the Company monitors factors that can positively or negatively impact property value, such as the age of the last valuation, the volatility of property values in specific markets, changes in the value of similar properties, and changes in the characteristics of individual properties. Changes in collateral value affect the ALLL through the risk rating or impaired loan evaluation process. Charge-offs are recognized when the amount of the loss is quantifiable and timing is known. The charge-off is measured based on the difference between the loan’s carrying value, including deferred fees, and the estimated fair value of the loan. When assessing property value for the purpose of determining a charge-off, a third-party appraisal or an independently derived internal evaluation is generally employed.

For mortgage loans secured by residential property where the Company is proceeding with a foreclosure action, a new valuation is obtained prior to the loan becoming 180 days past due and, if required, the loan is written down to fair value, net of estimated selling costs. In the event the Company decides not to proceed with a foreclosure action, the full balance of the loan is charged-off. If a loan remains in the foreclosure process for 12 months past the original charge-off, typically at 180 days past due, the Company obtains a new valuation and, if required, writes the loan down to the new valuation, less estimated selling costs. At foreclosure, a new valuation is obtained and the loan is transferred to OREO at the new valuation less estimated selling and holding costs; any loan balance in excess of the transfer value is charged-off. Estimated declines in value of the residential collateral between these formal evaluation events are captured in the ALLL based on changes in the house price index in the applicable metropolitan statistical area or other market information.

 

In addition to the ALLL, the Company also estimates probable losses related to unfunded lending commitments, such as letters of credit and binding unfunded loan commitments. Unfunded lending commitments are analyzed and segregated by risk similar to funded loans based on the Company’s internal risk rating scale. These risk classifications, in combination with an analysis of historical loss experience, probability of commitment usage, and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. The reserve for unfunded lending commitments is reported on the Consolidated Balance Sheets in other liabilities and the provision associated with changes in the unfunded lending commitment reserve is reported in the Consolidated Statements of Income/(Loss) in noninterest expense through the third quarter of 2009. Beginning in the fourth quarter of 2009, the Company began recording changes in the unfunded lending commitment reserve in the provision for credit losses.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In June 2009, the FASB issued ASU 2009-16, an update to ASC 860-10, “Transfers and Servicing,” and ASU 2009-17, an update to ASC 810-10, “Consolidation.” These updates were effective for the first interim reporting period of 2010. The update to ASC 860-10 amends the guidance to eliminate the concept of a QSPE and changes some of the requirements for derecognizing financial assets. The amendments to ASC 810-10: (a) eliminate the exemption for existing QSPEs from U.S. GAAP, (b) shift the determination of which enterprise should consolidate a 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 that could potentially be significant to the VIE will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE.

The Company analyzed the impacts of these amendments on all QSPEs and VIE structures with which it is involved. Based on this analysis, the Company consolidated its multi-seller conduit, Three Pillars, and a CLO entity. The Company consolidated these entities because certain subsidiaries of the Company have significant decision-making rights and own VIs that could potentially be significant to these VIEs. The primary balance sheet impacts from consolidating Three Pillars and the CLO on January 1, 2010, were increases in loans and leases, the related allowance for loan losses, LHFS, long-term debt, and other short-term borrowings. The consolidations of Three Pillars and the CLO had no impact on the Company’s earnings or cash flows that result from its involvement with these VIEs, but the Company’s Consolidated Statements of Income/(Loss) reflect a reduction in noninterest income and increases in net interest income and noninterest expense due to the consolidations. For additional information on the Company’s VIE structures, refer to Note 6, “Certain Transfers of Financial Assets, Mortgage Servicing Rights and Variable Interest Entities,” to the Consolidated Financial Statements.

The combined impact of consolidating Three Pillars and the CLO on January 1, 2010 was incremental total assets and total liabilities of $2.0 billion, respectively, and an immaterial impact on shareholders’ equity. No additional funding requirements with respect to these entities are expected to significantly impact the liquidity position of the Company. Upon adoption, the Company consolidated the assets and liabilities of Three Pillars at their unpaid principal amounts and subsequently accounted for these assets and liabilities on an accrual basis. The Company consolidated the assets and liabilities of the CLO based on their estimated fair values upon adoption, and made an irrevocable election to carry all of the financial assets and financial liabilities of the CLO at fair value. The impact on certain of the Company’s regulatory capital ratios as a result of consolidating Three Pillars and the CLO was not significant.

The Company was not the primary beneficiary of any other significant off-balance sheet entities with which it was involved at January 1, 2010; however, the accounting guidance requires an entity to reassess whether it is the primary beneficiary at least quarterly. The Company’s reassessment during the second quarter of 2010 indicated no additional primary beneficiary relationships.

In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, “Fair Value Measurements.” This update adds a new requirement to disclose transfers in and out of level 1 and level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for level 1 and level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for level 3 activities will be effective for the Company on January 1, 2011. The adoption of the disclosure requirements for level 1 and level 2 transfers and the expanded qualitative disclosures, had no impact on the Company’s financial position, results of operations, and EPS. The Company does not expect the adoption of the level 3 disclosure requirements to have an impact on its financial position, results of operations, and EPS.

In February 2010, the FASB issued ASU 2010-09, an update to ASC 855-10, “Subsequent Events.” This update amends the guidance to remove the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. SEC filers must continue to evaluate subsequent events through the date the financial statements are issued. The amendment was effective and has been adopted by the Company upon issuance.

 

In February 2010, the FASB issued ASU 2010-10, an update to ASC 810-10, “Consolidation.” This update defers the amendments to the consolidation requirements of ASC 810-10 for a reporting entity’s interest in entities that have the attributes of investment companies or for which it is acceptable based on industry practice to apply measurement principles that are consistent with those followed by investment companies. The deferral also applies to a reporting entity’s interest in an entity that is required to comply with or operate in accordance with requirements that are similar to those included in Rule 2a-7 of the Investment Company Act of 1940 for registered MMMFs. Certain of the Company’s wholly-owned subsidiaries provide investment advisor services for various private placement and publicly registered investment funds. The deferral applies to all of these funds.

In March 2010, the FASB issued ASU 2010-11, an update to ASC 815-15, “Derivatives and Hedging–Embedded Derivatives.” This update clarifies that the scope exception for considering certain credit-related features for potential bifurcation and separate accounting in ASC 815-15 applies to contracts containing an embedded credit derivative that is only in the form of subordination of one financial instrument to another. Other contracts containing embedded credit derivatives do not qualify for the scope exception. The adoption of this standard, effective July 1, 2010, did not have an impact on the Company’s financial position, results of operations and EPS.

In April 2010, the FASB issued ASU 2010-18, an update to ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” This update clarifies that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a TDR. Loans accounted for individually under ASC Subtopic 310-30 continue to be subject to the TDR accounting provisions within ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors.” This update was effective for the Company on July 1, 2010 and did not have an impact on the Company’s financial position, results of operations, and EPS.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The update requires companies to provide more disclosures about the credit quality of their financing receivables, which include loans, lease receivables, and other long-term receivables, and the credit reserves held against them. The disclosure requirements as of the end of a reporting period will be effective as of December 31, 2010. Disclosures about activity that occurs during a reporting period will be effective in the interim reporting period ending March 31, 2011. The Company is in the process of evaluating the new disclosure requirements.

Trading Assets and Liabilities
Trading Assets and Liabilities

Note 2 – Trading Assets and Liabilities

The fair values of the components of trading assets and liabilities at June 30, 2010 and December 31, 2009 were as follows:

 

(Dollars in thousands)    June 30
2010
   December 31
2009

Trading Assets

     

U.S. Treasury securities

   $360,217      $498,781  

Federal agency securities

   482,014      474,188  

U.S. states and political subdivisions

   52,004      58,520  

RMBS - agency

   230,455      94,164  

RMBS - private

   3,510      6,463  

CDO securities

   116,844      174,942  

ABS

   48,605      50,775  

Corporate and other debt securities

   641,501      465,637  

Commercial paper

   59,904      639  

Equity securities

   217,918      256,096  

Derivative contracts

   3,039,885      2,610,288  

Trading loans

   912,945      289,445  
         

Total trading assets

             $6,165,802              $4,979,938  
         

Trading Liabilities

     

U.S. Treasury securities

   $439,137      $189,461  

Federal agency securities

   17,169      3,432  

Corporate and other debt securities

   385,463      144,142  

Equity securities

   148      7,841  

Derivative contracts

   1,813,175      1,844,047  
         

Total trading liabilities

   $2,655,092      $2,188,923  
         

 

Securities Available for Sale
Securities Available for Sale

Note 3 – Securities Available for Sale

Securities AFS at June 30, 2010 and December 31, 2009 were as follows:

 

     June 30, 2010
(Dollars in thousands)        Amortized    
Cost
       Unrealized    
Gains
       Unrealized    
Losses
   Fair
Value

U.S. Treasury securities

   $5,218,329      $133,844      $19      $5,352,154  

Federal agency securities

   923,218      31,159      1      954,376  

U.S. states and political subdivisions

   836,880      29,812      7,508      859,184  

RMBS - agency

   15,666,731      532,092      -      16,198,823  

RMBS - private

   424,987      2,415      62,041      365,361  

ABS

   918,700      12,856      8,667      922,889  

Corporate bonds and other debt securities

   485,742      19,710      1,261      504,191  

Coke common stock

   69      1,503,531      -      1,503,600  

Other equity securities1

   936,823      959      -      937,782  
                   

Total securities available for sale

       $25,411,479          $2,266,378              $79,497          $27,598,360  
                   
     December 31, 2009
(Dollars in thousands)    Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

U.S. Treasury securities

   $5,206,383      $719      $30,576      $5,176,526  

Federal agency securities

   2,733,534      12,704      8,653      2,737,585  

U.S. states and political subdivisions

   927,887      27,799      10,629      945,057  

RMBS - agency

   15,704,594      273,207      61,724      15,916,077  

RMBS - private

   471,583      1,707      95,207      378,083  

ABS

   309,611      10,559      5,423      314,747  

Corporate bonds and other debt securities

   505,185      9,989      3,373      511,801  

Coke common stock

   69      1,709,931      -      1,710,000  

Other equity securities1

   786,248      918      -      787,166  
                   

Total securities available for sale

       $26,645,094          $2,047,533            $215,585          $28,477,042  
                   

1 At June 30, 2010, other equity securities included $343 million in FHLB of Cincinnati and FHLB of Atlanta stock (par value), $361 million in Federal Reserve Bank stock (par value), and $232 million in mutual fund investments (fair value). At December 31, 2009, other equity securities included $343 million in FHLB of Cincinnati and FHLB of Atlanta stock (par value), $360 million in Federal Reserve Bank stock (par value), and $82 million in mutual fund investments (fair value).

See Note 14, “Contingencies,” to the Consolidated Financial Statements for information concerning ARS classified as securities AFS.

Securities AFS that were pledged to secure public deposits, repurchase agreements, trusts, and other funds had a fair value of $6.2 billion as of June 30, 2010. Further, under The Agreements, the Company has pledged its shares of Coke common stock, as discussed in Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements. The Company has also pledged $949 million of certain trading assets and cash equivalents to secure $914 million of repurchase agreements as of June 30, 2010. Additionally, as of June 30, 2010, the Company had pledged $47.3 billion of net eligible loan collateral to support $28.7 billion in available borrowing capacity at either the Federal Reserve discount window or the FHLB of Atlanta. Of the available borrowing capacity, $8.1 billion was outstanding as of June 30, 2010.

 

The amortized cost and fair value of investments in debt securities at June 30, 2010 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

              

U.S. Treasury securities

   $676,181      $4,542,148      $-      $-      $5,218,329  

Federal agency securities

   197,988      585,742      121,625      17,863      923,218  

U.S. states and political subdivisions

   198,143      422,226      115,128      101,383      836,880  

RMBS - agency

   234,427      11,093,770      653,038      3,685,496      15,666,731  

RMBS - private

   25,829      172,282      226,876      -      424,987  

ABS

   353,403      561,043      4,254      -      918,700  

Corporate bonds and other debt securities

   8,635      308,627      142,746      25,734      485,742  
                        

Total debt securities

       $1,694,606          $17,685,838          $1,263,667          $3,830,476          $24,474,587  
                        

  Fair Value

              

U.S. Treasury securities

   $676,689      $4,675,465      $-      $-      $5,352,154  

Federal agency securities

   199,002      605,903      131,098      18,373      954,376  

U.S. states and political subdivisions

   202,606      442,087      120,182      94,309      859,184  

RMBS - agency

   240,741      11,481,360      707,988      3,768,734      16,198,823  

RMBS - private

   22,854      144,589      197,918      -      365,361  

ABS

   357,988      562,540      2,361      -      922,889  

Corporate bonds and other debt securities

   8,811      315,863      155,044      24,473      504,191  
                        

Total debt securities

   $1,708,691      $18,227,807      $1,314,591      $3,905,889      $25,156,978  
                        

Gross realized gains and losses on sales and OTTI on securities AFS during the periods were as follows:

 

     Three Months Ended    Six Months Ended
(Dollars in thousands)            June 30, 2010                    June 30, 2009                    June 30, 2010                    June 30, 2009        

Gross realized gains

   $62,445      $11,974      $77,436      $16,163  

Gross realized losses

   (4,676)     (31,133)     (17,062)     (31,224) 

OTTI

   (798)     (5,740)     (1,860)     (6,461) 
                   

Net securities gains

   $56,971      ($24,899)     $58,514      ($21,522) 
                   

Securities in a continuous unrealized loss position at June 30, 2010 and December 31, 2009 were as follows:

 

     June 30, 2010
     Less than twelve months    Twelve months or longer    Total
(Dollars in thousands)    Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

Temporarily impaired securities

                 

U.S. Treasury securities

   $251,213      $19      $-      $-      $251,213      $19  

Federal agency securities

   1,429      1      -      -      1,429      1  

U.S. states and political subdivisions

   8,067      1,720      93,369      5,788      101,436      7,508  

RMBS - private

   37,622      1,180      19,292      3,490      56,914      4,670  

ABS

   198,005      787      13,630      5,772      211,635      6,559  

Corporate bonds and other debt securities

   -      -      24,473      1,261      24,473      1,261  
                             

  Total temporarily impaired securities

   496,336      3,707      150,764      16,311      647,100      20,018  

Other-than-temporarily impaired securities

                 

RMBS - private

   -      -      298,743      57,371      298,743      57,371  

ABS

   5,659      2,108      -      -      5,659      2,108  
                             

  Total other-than-temporarily impaired securities

 

   5,659  

 

   2,108  

 

   298,743  

 

   57,371  

 

   304,402  

 

   59,479  

 

                             

    Total impaired securities

           $501,995                $5,815        $449,507          $73,682          $951,502          $79,497
                             

 

     December 31, 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

Temporarily impaired securities

                 

  U.S. Treasury securities

   $5,083,249      $30,571      $263      $5      $5,083,512      $30,576  

  Federal agency securities

   1,341,330      8,653      -      -      1,341,330      8,653  

  U.S. states and political subdivisions

   125,524      5,711      64,516      4,918      190,040      10,629  

  RMBS- agency

   5,418,226      61,724      -      -      5,418,226      61,724  

  RMBS - private

   14,022      3,174      7,169      385      21,191      3,559  

  ABS

   10,885      1,205      16,334      4,218      27,219      5,423  

  Corporate bonds and other debt securities

   19,819      2      30,416      3,371      50,235      3,373  
                             

    Total temporarily impaired securities

   12,013,055      111,040      118,698      12,897      12,131,753      123,937  

Other-than-temporarily impaired securities

                 

  RMBS - private

   646      906      304,493      90,742      305,139      91,648  
                             

    Total other-than-temporarily impaired securities

 

   646  

 

   906  

 

   304,493  

 

   90,742  

 

   305,139  

 

   91,648  

 

                             

      Total impaired securities

     $12,013,701          $111,946        $423,191            $103,639        $12,436,892            $215,585  
                             

On June 30, 2010, the Company held certain investment securities having unrealized loss positions. The Company does not intend to sell these securities nor is it more likely than not that the Company will be required to sell these securities before their anticipated recovery or maturity. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Market changes in interest rates and credit spreads will result in unrealized losses as the market price of securities fluctuates. The economic environment and illiquidity in the financial markets since 2008 have increased market yields on securities resulting in unrealized losses on certain securities within the Company’s portfolio.

The Company records OTTI through earnings based on the credit impairment estimates generally derived from cash flow analyses. The remaining unrealized loss, due to factors other than credit, is recorded in OCI. The unrealized OTTI loss relating to private RMBS as of June 30, 2010 includes purchased and retained interests from securitizations that have been other-than-temporarily impaired in prior periods. The unrealized OTTI loss relating to ABS is related to four securities within the portfolio that are home equity issuances and have also been other-than-temporarily impaired in prior periods. Based on the analysis of the underlying cash flows of these securities, there is no expectation of further credit impairment. In addition, the expectation of cash flows for the previously impaired ABS securities has improved such that the amount of expected credit losses was reduced and the expected increase in cash flows will be accreted into earnings as a yield adjustment over the remaining life of the securities.

The Company recorded OTTI losses on AFS securities as follows:

 

     Three Months Ended    Six Months Ended
(Dollars in thousands)          June 30, 2010                June 30, 2009                June 30, 2010                June 30, 2009      

Total OTTI losses1

   $798      $8,567      $1,860      $9,288  

Portion of losses recognized in OCI (before taxes)2

   -      2,827      -      2,827  
                   

Net impairment losses recognized in earnings

   $798      $5,740      $1,860      $6,461  
                   

1OTTI losses for the three and six months ended June 30, 2010 all related to private RMBS. OTTI losses of $8,567 thousand for the three months ended June 30, 2009 were comprised of $8,355 thousand related to private RMBS and $212 thousand related to other securities. OTTI losses of $9,288 thousand for the six months ended June 30, 2009 were comprised of $9,076 thousand related to private RMBS and $212 thousand related to other securities.

2OTTI losses recognized in OCI of $2,827 thousand for the three and six months ended June 30, 2009 all related to private RMBS.

 

The following is a rollforward of credit losses recognized in earnings for the six months ended June 30, 2010 and 2009 related to securities for which some portion of the impairment was recorded in OCI.

 

(Dollars in thousands)     

Balance as of December 31, 2009

   $21,602  

Reductions:

  

  Increases in expected cash flows recognized over the remaining life of the securities

   (246) 
    

Balance as of June 30, 20101

               $21,356  
    

1 During the six months ended June 30, 2010, the Company recognized $1,860 thousand of OTTI through earnings on debt securities in which no portion of the OTTI loss remained in AOCI at any time during the period. OTTI related to these securities are excluded from these amounts.

 

Balance as of April 1, 2009, effective date    $7,646  

Additions:

  

  OTTI credit losses on securities not previously impaired

     4,805  
      

Balance as of June 30, 20092

               $ 12,451  
      

2 During the three months ended June 30, 2009, the Company recognized $935 thousand of OTTI through earnings on debt securities in which no portion of the OTTI loss remained in AOCI at any time during the period. OTTI related to these securities are excluded from these amounts.

While all securities are reviewed quarterly for OTTI, the securities that gave rise to the OTTI recognized during the six months ended June 30, 2010 consisted of private RMBS with a fair market value of $1 million at June 30, 2010. Credit impairment that is determined through the use of cash flow models is estimated using cash flows on security specific collateral and the transaction structure. Future expected credit losses are determined by using various assumptions, the most significant of which include current default rates, prepayment rates, and loss severities. For the majority of the securities that the Company has reviewed for OTTI, credit information is available and modeled at the loan level underlying each security and also considers information such as loan to collateral values, FICO scores, and geographic considerations such as home price appreciation/depreciation. These inputs are updated on a regular basis to ensure the most current credit and other assumptions are utilized in the analysis. If, based on this analysis, the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are then discounted at the security’s initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities.

The following table presents a summary of the significant inputs used in determining the measurement of credit losses recognized in earnings for private RMBS as of June 30, 2010 and December 31, 2009.

 

             June 30, 2010                December 31, 2009    

Current default rate

   5 - 7%     2 - 17% 

Prepayment rate

   14 - 20%     6 - 21% 

Loss severity

   40 - 46%     35 - 52% 

 

Allowance for Credit Losses
Allowance for Credit Losses

Note 4 – Allowance for Credit Losses

Activity in the allowance for credit losses is summarized in the table below:

 

     Three Months Ended
June 30
   Six Months Ended
June 30
(Dollars in thousands)    2010    2009    2010    2009

Balance at beginning of period

   $3,276,601      $2,765,173      $3,234,900      $2,378,507  

Provision for loan losses1

   702,764      962,181      1,579,349      1,956,279  

Provision for unfunded commitments2

   (40,700)     (1,573)     (55,000)     1,089  

Loan charge-offs

   (768,109)     (835,558)     (1,630,070)     (1,482,474) 

Loan recoveries

   45,345      34,377      86,722      71,199  
                   

Balance at end of period

   $3,215,901          $2,924,600              $3,215,901              $2,924,600  
                   

Components:

           

  ALLL

   $3,156,000      $2,896,000        

  Unfunded commitments reserve3

   59,901      28,600        
               

Allowance for credit losses

           $3,215,901              $2,924,600        
               

1 The amount for the six months ended June 30, 2010, includes $676 thousand related to the consolidation of a VIE.

2 Beginning in the fourth quarter of 2009, the Company recorded the provision for unfunded commitments within the provision for credit losses in the Consolidated Statements of Income/(Loss). Considering the immateriality of this provision prior to the fourth quarter of 2009, the provision for unfunded commitments remains classified within other noninterest expense in the Consolidated Statements of Income/(Loss).

3 The unfunded commitments reserve is separately recorded in other liabilities in the Consolidated Balance Sheets.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

Note 5 – Goodwill and Other Intangible Assets

Goodwill is required to be tested for impairment on an annual basis or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In 2009 and the first quarter of 2010, the Company’s reporting units were comprised of Retail, Commercial, Commercial Real Estate, Household Lending, Corporate and Investment Banking, Wealth and Investment Management, and Affordable Housing. Effective in the second quarter of 2010, the Company reorganized its management and segment reporting structure. See Note 15, “Business Segment Reporting,” to the Consolidated Financial Statements for further discussion of the Company’s reorganization and change to segments. The change in segments impacted the goodwill reporting units as follows:

 

   

The Retail reporting unit was renamed Branch Banking; however, the composition of the reporting unit did not change.

 

   

Portions of the Corporate and Investment Banking reporting unit were transferred to the Commercial reporting unit, resulting in the allocation of approximately $43 million in goodwill from Corporate and Investment Banking to Commercial. As a result of the transfer, the Commercial reporting unit was renamed Diversified Commercial Banking.

As of June 30, 2010, the Company’s reporting units with goodwill balances were Branch Banking, Diversified Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.

Since the annual testing of the Company’s goodwill as of September 30, 2009, no events have occurred nor have circumstances changed, including the reorganization in the second quarter of 2010, which caused re-testing of goodwill during the first six months of 2010.

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 at that time. 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. 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 million was recorded, which was the entire amount of goodwill carried by each of those reporting units. $677 million of the goodwill impairment charge was non-deductible for tax purposes. The goodwill impairment charge was a direct result of the deterioration in the real estate markets and macro economic conditions that put downward pressure on the fair value of these businesses during the first quarter of 2009. The primary factor 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. The decline in fair value of these reporting units was significantly influenced by the economic downturn, which resulted in depressed earnings in these businesses and the significant decline in the Company’s market capitalization during the first quarter of 2009.

The 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
   Total

Balance, January 1, 2009

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

Intersegment transfers

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

Goodwill impairment

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

Seix contingent consideration

   -       -       -      -      -      12,722      12,722  

Purchase of the assets of Epic Advisers, Inc.

   -       -       -      -      -      5,012      5,012  

Purchase price adjustments

   474       -       -      -      -      3,827      4,301  
                                  

Balance, June 30, 2009

   $5,738,803       $-           $223,307      $-      $-      $352,272      $6,314,382  
                                  
(Dollars in thousands)    Retail and
Commercial
   Retail
Banking
   Diversified
Commercial
Banking
   Corporate
and
Investment
Banking
   Wealth and
Investment
Management
   Total     

Balance, January 1, 2010

     $5,738,803      $-      $-      $223,307      $356,968      $6,319,078     

Intersegment transfers

   (5,738,803)     4,854,582      927,520      (43,299)     -      -     

Inlign contingent consideration

   -      -      -      -      3,465      3,465     

Purchase price adjustments

   -      -      -      -      485      485     
                                

Balance, June 30, 2010

   $-          $4,854,582            $927,520          $180,008          $360,918          $6,323,028     
                                

Changes in the carrying amounts of other intangible assets for six months ended June 30 are as follows:

 

(Dollars in thousands)    Core Deposit
Intangibles
   MSRs
Amortized Cost
   MSRs
Fair Value
   Other    Total

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  
                        

Balance, January 1, 2010

   $104,240      $603,821      $935,561      $67,677      $1,711,299  

Designated at fair value (transfers from amortized cost)

   -      (603,821)     603,821      -      -  

Amortization

   (19,536)      -      -      (6,822)     (26,358) 

MSRs originated

   -      -      133,789      -      133,789  

Changes in fair value

              

Due to fair value election

   -      -      144,634      -      144,634  

Due to changes in inputs or assumptions 1

   -      -      (401,785)     -      (401,785) 

Other changes in fair value 2

   -      -      (118,352)     -      (118,352) 
                        

Balance, June 30, 2010

   $84,704      $-              $1,297,668                  $60,855                $1,443,227  
                        

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.

 

Effective January 1, 2009, the Company elected to create a second class of MSRs that was reported at fair value and is being actively hedged as discussed in Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements. The transfer of MSRs from LOCOM 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. At December 31, 2009, MSRs associated with loans originated or sold prior to 2008 continued to be accounted for at LOCOM and managed through the Company’s overall asset/liability management process. Effective January 1, 2010, the Company elected to designate all remaining MSRs carried at LOCOM at fair value. Upon designating the remaining MSRs at fair value in January 2010, the Company recognized a cumulative effect increase to retained earnings, net of taxes, of $89 million.

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

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

Certain Transfers of Financial Assets and related Variable Interest Entities

The Company has transferred residential and commercial mortgage loans, student loans, commercial and corporate loans, and CDO securities in sale or securitization transactions 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 includes owning certain beneficial interests, including senior and subordinate debt instruments as well as equity interests, servicing or collateral manager responsibilities, and guarantee or recourse arrangements. Except as specifically noted herein, the Company is not required to provide additional financial support to any of the entities to which the Company has transferred financial assets, nor has the Company provided any support it was not otherwise obligated to provide. Prior to January 1, 2010, interests that were held by the Company in transferred financial assets, excluding servicing and collateral management rights, were generally recorded as securities AFS or trading assets at their allocated carrying amounts based on their relative fair values at the time of transfer and were subsequently remeasured at fair value. In accordance with the new accounting guidance related to transfers of financial assets that became effective on January 1, 2010, upon completion of future transfers of assets that satisfy the conditions to be reported as a sale, the Company will derecognize the transferred assets and recognize at fair value any beneficial interests in the transferred financial assets such as trading assets or securities AFS, as well as servicing rights retained and guarantee liabilities incurred. See Note 13, “Fair Value Measurement and Election,” to the Consolidated Financial Statements for further discussion of the Company’s fair value methodologies.

When evaluating transfers and other transactions with VIEs for consolidation under the newly adopted VIE consolidation guidance, the Company first determines if it has a VI in the VIE. A VI is typically in the form of securities representing retained interests in the transferred assets and, at times, servicing rights and collateral manager fees. If the Company has a VI in the entity, it then evaluates whether or not it has both (1) the power to direct the activities that most significantly impact the economic performance of the VIE, and (2) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. If the Company determines that it does not have power over the significant activities of the VIE, an analysis of the economics of the VIE is not necessary. If it is determined that the Company does have power over the significant activities of the VIE, the Company must determine if it also has an obligation to absorb losses and/or the right to receive benefits that could potentially be significant to the VIE.

Below is a summary of transfers of financial assets to VIEs for which the Company has retained some level of continuing involvement.

Residential Mortgage Loans

The Company typically transfers first lien residential mortgage loans in conjunction with Ginnie Mae, Fannie Mae, and Freddie Mac securitization transactions whereby the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities issued through these transactions are guaranteed by the issuer and, as such, under seller/servicer agreements the Company is required to service the loans in accordance with the issuers’ servicing guidelines and standards. The Company sold residential mortgage loans to these entities, which resulted in pre-tax gains of $137 million and $201 million for the three months ended June 30, 2010 and 2009, respectively, and $222 million and $428 million for the six months ended June 30, 2010 and 2009, respectively. These gains are included within mortgage production related income in the Consolidated Statements of Income/(Loss). These gains include the change in value of the loans as a result of changes in interest rates from the time the related IRLCs were issued to the borrowers but do not include the results of hedging activities initiated by the Company to mitigate this market risk. See Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements for further discussion of the Company’s hedging activities. As seller, the Company has made certain representations and warranties with respect to the originally transferred loans, including those transferred under Ginnie Mae, Fannie Mae, and Freddie Mac programs, which are discussed in Note 11, “Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements.

 

 

In a limited number of securitizations, the Company has transferred loans to trusts, which previously qualified as QSPEs, sponsored by the Company. These trusts issue securities which are ultimately supported by the loans in the underlying trusts. 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 received securities are carried at fair value as either trading assets or securities AFS. As of June 30, 2010 and December 31, 2009, the fair value of securities received totaled $213 million and $217 million, respectively. At June 30, 2010, securities with a fair value of $192 million were valued using a third party pricing service. The remaining securities consist of subordinate interests from a 2003 securitization of prime fixed and floating rate loans and were valued using a discounted cash flow model that uses historically derived prepayment rates and credit loss assumptions along with estimates of current market discount rates. The Company did not significantly modify the assumptions used to value these retained interests at June 30, 2010 from the assumptions used to value the interests at December 31, 2009. For both periods, analyses of the impact on the fair values of two adverse changes from the key assumptions were performed and the resulting amounts were insignificant for each key assumption and in the aggregate.

The Company evaluated these securitization transactions for consolidation under the newly adopted VIE consolidation guidance. As servicer of the underlying loans, the Company is generally deemed to have power over the securitization. However, if a single party, such as the issuer or the master servicer, effectively controls the servicing activities or has the unilateral ability to terminate the Company as servicer without cause, then that party is deemed to have power. In almost all of its securitization transactions, the Company does not retain power over the securitization as a result of these rights held by the master servicer; therefore, an analysis of the economics of the securitization is not necessary. In certain transactions, the Company does have power as the servicer; however, the Company does not also have an obligation to absorb losses or the right to receive benefits that could potentially be significant to the securitization. The absorption of losses and the receipt of benefits would generally manifest itself through the retention of senior or subordinated interests. As of January 1, 2010, the Company determined that it was not the primary beneficiary of, and thus did not consolidate, any of these securitization transactions. No events occurred during the six months ended June 30, 2010 that would change the Company’s previous conclusion that it is not the primary beneficiary of any of these securitization transactions. Total assets as of June 30, 2010 and December 31, 2009 of the unconsolidated trusts in which the Company has a VI are $724 million and $780 million, respectively.

The Company’s maximum exposure to loss related to the unconsolidated VIEs in which it holds a VI is comprised of the loss of value of any interests it retains and any repurchase obligations it incurs as a result of a breach of its representations and warranties.

Separately, the Company has accrued $76 million and $36 million as of June 30, 2010 and December 31, 2009 for contingent losses related to certain of its representations and warranties made in connection with other previous transfers of nonconforming loans. The Company did not repurchase any of these previously transferred loans during the six months ended June 30, 2010 or 2009.

Commercial and Corporate Loans

In 2007, the Company completed a $1.9 billion structured sale of corporate loans to multi-seller CP 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. During the six months ended June 30, 2009, the Company wrote this residual interest and related accrued interest to zero, resulting in a loss of $17 million. This write off was the result of the deterioration in the performance of the loan pool to such an extent that the Company expects that it will no longer receive cash flows on the interest until the senior participation interest has been repaid in full. In conjunction with the transfer of the loans, the Company provided 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 $322 million at December 31, 2009. Due to deterioration in the loans that collateralize these facilities, the Company recorded a contingent loss reserve of $16 million on the facilities during the year ended December 31, 2009. In January 2010, the administrator of the conduits drew on these commitments in full, resulting in a funded loan to the conduits that is recorded on the Company’s Consolidated Balance Sheets. This event did not modify the Company’s sale accounting treatment or conclusion that it is not the primary beneficiary of these VIEs. In addition, no other events have occurred during the six months ended June 30, 2010 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 involvement with CLO entities that own commercial leveraged loans and bonds, certain of which were transferred by the Company to the CLOs. In addition to retaining certain securities issued by the CLOs, the Company also acts as collateral manager for these CLOs. The securities retained by the Company and the fees received as collateral manager represent a VI in the CLOs, which are considered to be VIEs.

Beginning January 1, 2010, upon adoption of the new VIE consolidation guidance, the Company determined that it was the primary beneficiary of, and thus, would consolidate one of these CLOs as it has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses and the right to receive benefits from the entity that could potentially be significant to the CLO. In addition to fees received as collateral manager, including eligibility for performance incentive fees, and owning certain preference shares, the Company’s multi-seller conduit, Three Pillars, owns a senior interest in the CLO, resulting in economics that could potentially be significant to the VIE. Accordingly, on January 1, 2010, the Company consolidated $307 million in total assets and $279 million in net liabilities, after the elimination of this senior interest. The Company elected to consolidate the CLO at fair value and to carry the financial assets and financial liabilities of the CLO at fair value subsequent to adoption. The initial consolidation of the CLO had a negligible impact on the Company’s Consolidated Statements of Shareholders’ Equity. Substantially all of the assets and liabilities of the CLO are loans and issued debt, respectively. The loans are classified within loans held for sale at fair value and the debt is included with long-term debt at fair value on the Company’s Consolidated Balance Sheets (see Note 13, “Fair Value Measurement and Election,” to the Consolidated Financial Statements for a discussion of the Company’s methodologies for estimating the fair values of these financial instruments). The Company is not obligated, contractually or otherwise, to provide financial support to this VIE nor has it previously provided support to this VIE. Further, creditors of the VIE have no recourse to the general credit of the Company, as the liabilities of the CLO are paid only to the extent of available cash flows from the CLO’s assets.

For the remaining CLOs, which are also considered to be VIEs, the Company has determined that it is not the primary beneficiary as it does not have an obligation to absorb losses or the right to receive benefits from the entities that could potentially be significant to the VIE. During the six months ended June 30, 2009, the Company recognized losses of $7 million, which represented the complete write off of the preference shares in certain of the VIEs due to the continued deterioration in the performance of the collateral in those vehicles. At December 31, 2009, the carrying value of the Company’s investment in the preference shares was zero; however, during the first six months of 2010, the Company observed an improvement in cash flow expectations as well as an overall steady recovery in value in the broader CLO market. As a result, the Company marked up the value of the CLO preference shares by less than $10 million, which represented the market value of the Company’s investment in the preference shares at June 30, 2010. The Company receives fees for managing the assets of these vehicles; these fees are considered adequate compensation and are commensurate with the level of effort required to provide such services. The fees received by the Company from these entities are recorded as trust and investment management income in the Consolidated Statements of Income/(Loss) and totaled $3 million and $1 million for the three months ended June 30, 2010 and 2009, respectively, and $7 million and $4 million for the six months ended June 30, 2010 and 2009, respectively. Senior fees earned by the Company are generally not considered at risk; however, subordinate fees earned by the Company are subject to the availability of cash flows and to the priority of payments. The estimated assets and liabilities of these entities that were not included on the Company’s Consolidated Balance Sheets were $2.2 billion and $2.1 billion, respectively, at June 30, 2010 and $2.3 billion and $2.2 billion, respectively, at December 31, 2009. The Company is not obligated to provide any support to these entities, nor has it previously provided support to these entities. No events occurred during the six months ended June 30, 2010 that would change the Company’s previous conclusion that it is not the primary beneficiary of any of these securitization transactions.

Student Loans

In 2006, the Company completed a securitization of government guaranteed student loans through a transfer of loans to a securitization SPE, which previously qualified as a QSPE, and retained the corresponding residual interest in the SPE. The residual interest, classified within trading assets on the Company’s Consolidated Balance Sheet, and any losses the Company might incur as a result of that breach, represents the Company’s maximum exposure to loss as a result of its involvement with the VIE. The fair value of the residual interest at both June 30, 2010 and December 31, 2009 was less than $25 million. The key assumptions and inputs used by the Company in valuing this retained interest include prepayment speeds and the discount rate. The Company did not significantly modify the assumptions used to value the retained interest at June 30, 2010 from the assumptions used to value the retained interest at December 31, 2009. For both periods, analyses of the impact on the fair values of two adverse changes from the key assumptions were performed and the resulting amounts were insignificant for each key assumption and in the aggregate.

The total assets and liabilities of this VIE that were not included in the Company’s Consolidated Balance Sheets were $504 million and $497 million, respectively, at June 30, 2010 and $532 million and $522 million, respectively, at December 31, 2009. The Company is not obligated to provide any noncontractual support to this entity, nor has it previously provided support to this entity. All of the student loans that were securitized are U.S. government guaranteed student loans. As such, the Company has agreed to service each loan consistent with the guidelines determined by the applicable government agencies in order to maintain that guarantee. A breach of this responsibility could obligate the Company to repurchase the loan from the VIE at par. The Company believes that it does not have the power to direct activities that most significantly impact the economic performance of the VIE that holds these student loans, and it is therefore not the primary beneficiary of the VIE under the new VIE consolidation guidance. No events occurred during the six months ended June 30, 2010 that would change the Company’s previous conclusion that it is not the primary beneficiary of this VIE.

CDO Securities

The Company has transferred bank trust preferred securities in securitization transactions. The majority of these transfers occurred between 2002 and 2005, with one transaction completed in 2007. The Company retained equity interests in certain of these entities and also holds certain senior interests that were acquired during 2007 and 2008 in conjunction with its acquisition of assets from Three Pillars and the ARS transactions discussed in Note 14, “Contingencies,” to the Consolidated Financial Statements. During 2009, the Company sold its senior interest related to the acquisition of assets from Three Pillars; however, the Company continues to hold senior interests related to the ARS purchases. The assumptions and inputs considered by the Company in valuing this retained interest include prepayment speeds, credit losses, and the discount rate. The Company did not significantly modify the assumptions used to value the retained interest at June 30, 2010 from the assumptions used to value the interest at December 31, 2009. Due to the seniority of the interests in the structure, current estimates of credit losses in the underlying collateral could withstand a 20% adverse change without the securities incurring a loss. In addition, while all the underlying collateral is currently eligible for repayment by the obligor, given the nature of the collateral and the current repricing environment, the Company assumed no prepayment would occur before the final maturity, which is approximately 24 years on a weighted average basis. Therefore, the key assumption in valuing these securities was the assumed discount rate, which was estimated to be 14% over LIBOR. For both periods, analyses of the impact on the fair values of two adverse changes from the key assumption were performed. At both June 30, 2010 and December 31, 2009, a 20% adverse change in the assumed discount rate resulted in a decline of $5 million in the fair value of these securities.

The Company is not obligated to provide any support to these entities and its maximum exposure to loss at June 30, 2010 and December 31, 2009 was limited to (i) the current senior interests held in trading securities, which had a fair value of $25 million and $26 million, respectively and (ii) the remaining senior interests expected to be purchased in conjunction with the ARS issue, which had a total fair value of $2 million. The total assets of the trust preferred CDO entities in which the Company has remaining exposure to loss was $1.3 billion at both June 30, 2010 and December 31, 2009, respectively. The Company determined that it was not the primary beneficiary of any of these VIEs under the new VIE consolidation guidance, as the Company lacks the power to direct the significant activities of any of the VIEs. No events occurred during the six months ended June 30, 2010 that called into question either the Company’s sale accounting or the Company’s conclusions that it is not the primary beneficiary of these VIEs.

The following tables present certain information related to the Company’s asset transfers in which it has continuing economic involvement for the three and six months ended June 30:

 

     Three Months Ended June 30, 2010
(Dollars in thousands)        Residential    
Mortgage
Loans
   Commercial
    and Corporate     
Loans
       Student    
Loans
   CDO
    Securities    
       Total    

Cash flows on interests held

   $13,349    $861    $477    $465    $15,152

Servicing or management fees

   1,024
   3,556    184    -      4,764
     Three Months Ended June 30, 2009
(Dollars in thousands)        Residential    
Mortgage
Loans
   Commercial
    and Corporate     
Loans
       Student    
Loans
   CDO
    Securities    
       Total    

Cash flows on interests held

   $26,262    $308    $3,377    $1,204    $31,151

Servicing or management fees

   1,266    1,865    153    -  
   3,284

 

 

     Six Months Ended June 30, 2010
(Dollars in thousands)        Residential    
Mortgage
Loans
   Commercial
  and Corporate  
Loans
       Student    
Loans
   CDO
    Securities    
           Total        

Cash flows on interests held

   $27,695    $1,760    $3,401    $862    $33,718

Servicing or management fees

   2,093
   6,850    375    -      9,318

 

     Six Months Ended June 30, 2009
(Dollars in thousands)        Residential    
Mortgage
Loans
   Commercial
  and Corporate  
Loans
       Student    
Loans
   CDO
    Securities    
           Total        

Cash flows on interests held

   $52,389    $702    $3,715    $1,644    $58,450

Servicing or management fees

   2,602    4,848    357    -      7,807

Portfolio balances and delinquency balances based on 90 days or more past due (including accruing and nonaccrual loans) as of June 30, 2010 and December 31, 2009, and net charge-offs related to managed portfolio loans (both those that are owned by the Company and those that have been transferred) for three and six months ended June 30, 2010 and 2009 are as follows:

 

     Principal Balance        Past Due        Net Charge-offs
                                 For the Three
    Months Ended    
       For the Six
    Months Ended    
    

    June 30,    

  

    December 31,    

      

    June 30,    

  

    December 31,    

       June 30,        June 30,
(Dollars in millions)    2010    2009        2010    2009        2010    2009        2010    2009

Type of loan:

                             

Commercial

   $32,523      $32,494        $402      $508        $87      $150        $183      $281  

Residential mortgage and home equity

   46,569      46,743        3,279      4,065        430      512        1,004      851  

Commercial real estate and construction

   20,138      21,721        1,899      1,902        163      85        257      168  

Consumer

   12,664      11,649        481      428        21      32        50      72  

Credit card

   1,031      1,068        15      -        21      22        49      39  
                                             

Total loan portfolio

   112,925      113,675        6,076      6,903        722      801        1,543      1,411  

Managed securitized loans

                             

Commercial

   2,961      3,460        64      64        22      13        22      20  

Residential mortgage

   1,368      1,482        124      123        11      15        22      24  

Other

   482      506        23      25        -      -        -      -  
                                             

Total managed loans

   $117,736      $119,123        $6,287      $7,115        $755      $829        $1,587      $1,455  
                                             

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 on behalf of Ginnie Mae, Fannie Mae, and Freddie Mac 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 $128.7 billion and $127.8 billion at June 30, 2010 and December 31, 2009, respectively. Related servicing fees received by the Company were $94 million and $79 million for the three months ended June 30, 2010 and 2009, respectively, and $187 million and $155 million for the six months ended June 30, 2010 and 2009, 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. Previously, the Company maintained two classes of MSRs: MSRs related to loans originated and sold after January 1, 2008, which were reported at fair value, and MSRs related to loans sold before January 1, 2008, which were reported at amortized cost, net of any allowance for impairment losses. Beginning January 1, 2010, the Company elected to account for all MSRs at fair value. See Note 5, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements for the rollforward of MSRs. As of December 31, 2009, the Company had established an MSR valuation allowance of $7 million. No permanent impairment losses were recorded against the allowance for MSRs carried at amortized cost during the year ended December 31, 2009.

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 was $100 million and $82 million for the three months ended June 30, 2010 and 2009, respectively, and $198 million and $164 million for the six months ended June 30, 2010 and 2009, respectively. These amounts are reported in mortgage servicing related income in the Consolidated Statements of Income/(Loss).

 

As of June 30, 2010 and December 31, 2009, the total unpaid principal balance of mortgage loans serviced was $177.8 billion and $178.9 billion, respectively. Included in these amounts were $145.8 billion and $146.7 billion as of June 30, 2010 and December 31, 2009, respectively, of loans serviced for third parties.

A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the Company’s MSRs as of June 30, 2010 and December 31, 2009, and the sensitivity of the fair values to immediate 10% and 20% adverse changes in those assumptions are as follows:

 

     June 30, 2010            December 31, 2009  
(Dollars in millions)    Fair Value          Fair Value         LOCOM    

Fair value of retained MSRs

   $1,298       $936       $749    

Prepayment rate assumption (annual)

   22    %    10    %    17    % 

Decline in fair value of 10% adverse change

   $66       $30       $30    

Decline in fair value of 20% adverse change

   125       58       58    

Discount rate (annual)

   10    %    10    %    12    % 

Decline in fair value of 10% adverse change

   $40       $39       $27    

Decline in fair value of 20% adverse change

   77       75       51    

Weighted-average life (in years)

   4.1       7.5       4.8    

Weighted-average coupon

   5.6    %    5.2    %    6.1    % 

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.

Other Variable Interest Entities

In addition to the Company’s involvement with certain VIEs, which is discussed herein under “Certain Transfers of Financial Assets and related Variable Interest Entities,” 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 CP conduit, Three Pillars. Three Pillars provides financing for direct purchases of financial assets originated and serviced by SunTrust’s corporate clients by issuing CP.

The Company has determined that Three Pillars is a VIE as Three Pillars has not issued sufficient equity at risk. Previously, Three Pillars had issued a subordinated note to a third party, which would have absorbed the first dollar of loss in the event of nonpayment of any of Three Pillars’ assets. The outstanding and committed amounts of the subordinated note were $20 million at December 31, 2009 and no losses had been incurred through December 31, 2009. In January 2010, Three Pillars repaid and extinguished the subordinated note in full. In accordance with the provisions of the new VIE consolidation guidance, the Company has determined that it is the primary beneficiary of Three Pillars, as certain subsidiaries have both the power to direct the significant activities of Three Pillars and own potentially significant VIs, as discussed further herein. No losses on any of Three Pillars’ assets were incurred during the six months ended June 30, 2010.

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 revenue for the Company, net of direct salary and administrative costs, of $15 million and $16 million for the three months ended June 30, 2010 and 2009, respectively, and $30 million and $33 million for the six months ended June 30, 2010 and 2009, respectively.

At June 30, 2010, the Company’s Consolidated Balance Sheets reflected $1.7 billion of secured loans held by Three Pillars, which are included within commercial loans, and $180 million of CP issued by Three Pillars, excluding intercompany liabilities, which is included within other short-term borrowings; other assets and liabilities were de minimis to the Company’s Consolidated Balance Sheets. The assets and liabilities of Three Pillars were consolidated by the Company at their unpaid principal amounts at January 1, 2010; upon consolidation, the Company recorded an allowance for loan losses on $1.7 billion of secured loans that were consolidated at that time, resulting in a transition adjustment of less than $1 million, which is presented as “Adoption of VIE consolidation guidance” on the Company’s Consolidated Statements of Shareholders’ Equity.

Funding commitments extended by Three Pillars to its customers totaled $3.8 billion at June 30, 2010, almost all of which renew annually. At December 31, 2009, Three Pillars had $1.8 billion of assets not included on the Company’s Consolidated Balance Sheet and funding commitments and outstanding receivables totaled $3.7 billion and $1.7 billion, respectively. 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. Trade receivables and commercial loans collateralize 53% and 17%, respectively, of the outstanding commitments, as of June 30, 2010, compared to 50% and 18%, respectively, as of December 31, 2009. Total assets supporting outstanding commitments have a weighted average life of 2.23 years and 1.69 years at June 30, 2010 and December 31, 2009, respectively.

Each transaction added to Three Pillars is typically structured to a minimum implied A/A2 rating according to established credit and underwriting policies as approved by credit risk management and monitored on a regular basis to ensure compliance with each transaction’s terms and conditions. Typically, transactions contain dynamic credit enhancement 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. For the six months ended June 30, 2010 and 2009, there were no write-downs of Three Pillars’ assets.

At June 30, 2010, Three Pillars’ outstanding CP used to fund its assets had remaining weighted average lives of 18 days and maturities through September 16, 2010. The assets of Three Pillars generally provide the sources of cash flows for the CP. However, the Company has issued commitments in the form of liquidity facilities and other credit enhancements to support the operations of Three Pillars. Due to the Company’s consolidation of Three Pillars as of January 1, 2010, these commitments would be eliminated in consolidation for U.S. GAAP purposes. The liquidity commitments are revolving facilities that are sized based on the current commitments provided by Three Pillars to its customers. The liquidity facilities may generally be 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.

Due to the consolidation of Three Pillars, the Company’s maximum exposure to potential loss was $3.9 billion as of June 30, 2010, which represents the Company’s exposure to the lines of credit that Three Pillars had extended to its clients. Prior to consolidation, the Company had $3.8 billion and $371 million, respectively, of liquidity facilities and other credit enhancements outstanding as of December 31, 2009. The Company did not recognize any liability on its Consolidated Balance Sheets related to these liquidity facilities and other credit enhancements as of June 30, 2010 or December 31, 2009, 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 commitments during the six months ended June 30, 2010 or 2009.

 

Total Return Swaps

The Company has had involvement with various VIEs related to its TRS business. The Company had unwound prior transactions during 2009, such that no such transactions were outstanding at December 31, 2009. However, during the six months ended June 30, 2010, the Company began to execute new TRS transactions.

Under the matched book TRS business model, the VIEs purchase assets (typically loans) from the market that serve as the underlying reference assets for a TRS between the VIE and the Company and a mirror TRS between the Company and its third party clients. The TRS between the VIEs and the Company hedge the Company’s exposure to the TRS with its third party clients. 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 reference assets, the Company provides senior financing, in the form of demand notes, to these VIEs. The TRS contracts pass through interest and other cash flows on the assets owned by the VIEs to the third parties, along with exposing the third parties to depreciation on the assets and providing them with the rights to appreciation on the assets. The terms of the TRS contracts require the third parties to post initial collateral, in addition to ongoing margin as the fair values of the underlying assets change. There is no legal obligation between the Company and its third party clients for the Company to purchase the reference assets or for the Company to cause the VIEs to purchase the assets.

Prior to January 1, 2010, the Company had concluded it was not the primary beneficiary of the VIEs, as the VIEs were designed for the benefit of the third parties. Specifically, the third parties had implicit VIs in the VIEs via their TRS contracts with the Company, whereby these third parties absorbed the majority of the expected losses and were entitled to the majority of the expected residual returns of the VIEs. The Company has considered the new VIE consolidation guidance with respect to the new VIEs established subsequent to January 1, 2010. Specifically, the Company has evaluated the nature of all VIs and other interests and involvement with the VIEs, in addition to the purpose and design of the VIEs, relative to the risks they were designed to create. Based on this evaluation, the Company has determined that it is not the primary beneficiary of the VIEs, as the design of the TRS business results in the Company having limited power to direct the significant activities of the VIEs. The purpose and design of a VIE are key components of a consolidation analysis and any power should be analyzed based on the substance of that power relative to other facts and circumstances. As discussed herein, the VIEs would not exist if the Company did not enter into the TRS contracts with the third parties.

At June 30, 2010, the Company had $595 million in senior financing outstanding to VIEs, which was classified within trading assets on the Consolidated Balance Sheets and carried at fair value. These VIEs had entered into TRS contracts with the Company with outstanding notional amounts of $594 million at June 30, 2010 and the Company had entered into mirror TRS contracts with its third parties with the same outstanding notional amounts. At June 30, 2010, the fair values of these TRS derivative assets and derivative liabilities were $6 million and $4 million, respectively. The notional amounts of the TRS contracts with the VIEs represent the Company’s maximum exposure to loss, although such exposure to loss has been mitigated via the TRS contracts with the third parties. The Company has not provided any support that it was not contractually obligated to for the six months ended June 30, 2010. For additional information on the Company’s TRS with these VIEs, see Note 10, “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 it does not own 100% of the entity because the holders of the equity investment at risk do not have the power through voting rights or similar rights to direct the activities of the entity that most significantly impact the entity’s economic performance. 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 2010 and 2009, the Company 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, the Company operates strictly as a general partner and, as such, has both (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of and the right to receive benefits from the entity that could potentially be significant to the VIE. Accordingly, the Company consolidates these partnerships on its Consolidated Balance Sheets. As the general partner, the Company typically guarantees the tax credits due to the limited partner and is responsible for funding construction and operating deficits. As of June 30, 2010 and December 31, 2009, total assets, which consist primarily of fixed assets and cash attributable to the consolidated partnerships, were $11 million and $14 million, respectively, and total liabilities, excluding intercompany liabilities, were $1 million and $3 million, respectively. Security deposits from the tenants are recorded as liabilities on the Company’s Consolidated Balance Sheets. 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 de minimis as of June 30, 2010 and December 31, 2009. While the obligations of the general partner are generally non-recourse to the Company, as the general partner, the Company may from time to time step in when needed to fund deficits. During 2010 and 2009, the Company did not provide any significant amount of funding as the general partner or to cover 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 does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance. The Company accounts for its limited partner interests in accordance with the accounting guidance for investments in affordable housing projects. The general partner or an affiliate of the general partner provides guarantees to the limited partner which protect the Company from losses attributable to operating deficits, construction deficits and tax credit allocation deficits. Partnership assets of $1.1 billion in these partnerships were not included in the Consolidated Balance Sheets at June 30, 2010 and December 31, 2009. These limited partner interests had carrying values of $211 million and $218 million at June 30, 2010 and December 31, 2009, 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 $452 million and $468 million at June 30, 2010 and December 31, 2009, respectively. The Company’s maximum exposure to loss would be borne by the loss of the limited partnership equity investments along with $220 million and $219 million of loans issued by the Company to the limited partnerships at June 30, 2010 and December 31, 2009, 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 the Company owns both the limited partner and general partner or acts as the 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, 2010 and December 31, 2009, total assets, which consist primarily of fixed assets and cash, attributable to the consolidated, non-VIE partnerships were $410 million and $425 million, respectively, and total liabilities, excluding intercompany liabilities, primarily representing third-party borrowings, were $108 million and $209 million, respectively. See Note 13, “Fair Value Measurement and Election,” to the Consolidated Financial Statements for further discussion on the impact of impairment charges on affordable housing partnership investments recorded during the six months ended June 30, 2010 and 2009.

Registered and Unregistered Funds Advised by RidgeWorth

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. In February 2010, the FASB issued guidance that defers the application of the new VIE consolidation guidance for investment funds meeting certain criteria. All of the registered and unregistered Funds advised by RidgeWorth meet the scope exception criteria and thus are not evaluated for consolidation under the new guidance. Accordingly, the Company continues to apply the consolidation guidance in effect prior to the issuance of the new guidance to interests in funds that qualify for the deferral. Further, funds that were determined to be VIEs under the previous accounting guidance and are still considered VIEs under the new accounting guidance are required to comply with the new disclosure requirements.

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 nor expected returns of the funds. The Company’s exposure to loss is limited to the investment advisor and other administrative fees it earns and if applicable, any equity investments. Payment of fees is received from the individual investor accounts. The total unconsolidated assets of these funds as of June 30, 2010 and December 31, 2009 were $2.8 billion and $3.3 billion, respectively.

The Company does not have any contractual obligation to provide monetary support to any of the Funds and did not provide any support, contractual or otherwise, to the Funds during the six months ended June 30, 2010 and 2009.

 

Loss Per Share
Loss Per Share

Note 7 – Loss Per Share

Net loss is the same in the calculation of basic and diluted loss per average common share. Equivalent shares of 32 million and 36 million related to common stock options and common stock warrants outstanding as of June 30, 2010 and 2009, respectively, were excluded from the computations of diluted loss per average common 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, 2010 and 2009 is included below. Additionally, included below is a reconciliation of net loss to net loss available to common shareholders.

 

           Three Months Ended      
June 30
           Six Months Ended         
June 30
(In thousands, except per share data)    2010    2009    2010    2009

Net income/(loss)

   $12,384      ($183,460)     ($148,430)     ($998,627) 

Series A preferred dividends

   (1,762)     (5,635)     (3,488)     (10,635) 

U.S. Treasury preferred dividends and accretion of discount

   (66,690)     (66,546)     (133,295)     (132,825) 

Gain on repurchase of Series A preferred stock

   -      89,425      -      89,425  

Dividends and undistributed earnings allocated to unvested shares

   (41)     1,788      (80)     12,853  
                   

Net loss available to common shareholders

   ($56,109)     ($164,428)     ($285,293)     ($1,039,809) 
                   

Average basic common shares

   495,351      399,242      495,112      375,429  

Effect of dilutive securities:

           

Stock options

   983      279      945      140  

Restricted stock

   2,165      1,112      2,312      831  
                   

Average diluted common shares

   498,499      400,633      498,369      376,400  
                   

Loss per average common share - diluted

   ($0.11)     ($0.41)     ($0.58)     ($2.77) 
                   

Loss per average common share - basic

   ($0.11)     ($0.41)     ($0.58)     ($2.77) 
                   
Income Taxes
Income Taxes

Note 8 - Income Taxes

The provision for income taxes was a benefit of $50 million and $149 million for the three months ended June 30, 2010 and 2009, respectively, representing negative effective tax rates of 133.1% and 44.8% during those periods. The provision for income taxes was a benefit of $244 million and $300 million for the six months ended June 30, 2010 and 2009, respectively, representing negative effective tax rates of 62.2% and 23.1% during those periods. The Company calculated the benefit for income taxes for the three and six months ended June 30, 2010 and 2009 based on the discrete methodology using actual year-to-date results.

As of June 30, 2010, the Company’s gross cumulative UTBs amounted to $105 million, of which $72 million (net of federal tax benefit) would affect the Company’s effective tax rate, if recognized. As of December 31, 2009, the Company’s gross cumulative UTBs amounted to $161 million. The reduction in UTBs was primarily attributable to the settlement of an examination by a taxing authority and the related payments and reversal of the liability. Additionally, the Company recognized a gross liability of $33 million and $39 million for interest related to its UTBs as of June 30, 2010 and December 31, 2009, respectively. Interest related to UTBs was an expense of approximately $2 million and an income of approximately $3 million for the three and six months ended June 30, 2010, compared to an expense of approximately $4 million and approximately $11 million, for the same periods in 2009. 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 up to $13 million due to completion of tax authority examinations and the expiration of statutes of limitations.

The Company files consolidated and separate income tax returns in the United States federal jurisdiction and in various state jurisdictions. As of June 30, 2010, the Company’s federal returns through 2006 have been examined by the IRS. All issues have been resolved for tax years through 2004. Only one issue remains in dispute for tax years 2005 and 2006. The Company’s 2007 through 2009 federal income tax returns are currently under examination by the IRS. 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.

 

Employee Benefit Plans
Employee Benefit Plans

Note 9 - Employee Benefit Plans

The Company sponsors various short and LTI plans for eligible employees. The Company delivers LTIs through various incentive programs, including stock options, restricted stock, LTI cash plan, and salary shares. Certain employees received long-term deferred cash awards which are subject to a three year vesting requirement. The accrued liability related to these deferred cash grants was $42 million and $28 million as of June 30, 2010 and December 31, 2009, respectively.

An important new compensation development that had the characteristics of both base salary and equity emerged as part of the U.S. Treasury’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance. This compensation development became known as salary shares. Specifically, the Interim Rule prohibits the payment of short-term incentives (annual bonus) and stock options to the SEO and to the next 20 most highly compensated employees. Effective January 1, 2010, the Company chose to use the salary share concept because it is specifically authorized by EESA to address the constraints on the annual cash bonus and equity awards; and the Company believes it is necessary that it use this approach to remain competitive and to minimize the risk of talent flight to other companies with which it competes. Specifically, the Company will pay additional base salary amounts in the form of stock (salary shares) to the SEO and other employees who are among the next 20 most highly-compensated employees. The Company will do this each pay period in the form of stock units under the SunTrust Banks, Inc. 2009 Stock Plan. The stock units will not include any rights to receive dividends or dividend equivalents. As required by EESA, each salary share will be non-forfeitable upon grant but may not be sold or transferred until the expiration of a holding period (except as necessary to satisfy applicable withholding taxes). As a result, these individuals are at risk for the value of our stock price until the stock unit is settled. The stock units will be settled in cash; one half on March 31, 2011 and one half on March 31, 2012, unless settled earlier due to the executive’s death. The amount to be paid on settlement of the stock units will be equal to the value of a share of SunTrust common stock on the settlement date. Benefit plan determinations and limits were established to ensure that the salary shares were accounted for equitably within relevant benefit plans. As of June 30, 2010, the accrual related to salary shares was $4 million.

Stock-Based Compensation

The weighted average fair values of options granted during the first six months of 2010 and 2009 were $12.78 per share and $5.13 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      
     2010     2009  

Dividend yield

   0.17    %    4.16   % 

Expected stock price volatility

   56.10       83.17    

Risk-free interest rate (weighted average)

   2.84       1.94    

Expected life of options

   6 years       6 years    

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

 

     Stock Options    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, 2010

   17,661,216      $9.06 -$150.45     $53.17      4,770,172      $59,161      $37.02  

Granted

   1,192,974      22.69 - 27.79     23.64      921,938      21,155      22.95  

Exercised/vested

   -         -      (1,078,154)     -      71.72  

Cancelled/expired/forfeited

   (552,046)     9.06 - 79.73     55.33      (106,302)     (3,210)     30.20  

Amortization of restricted stock compensation

   -         -      -      (22,221)     -  
                             

Balance, June 30, 2010

   18,302,144      $9.06 -$150.45     $51.18      4,507,654      $54,885      $26.01  
                             
                 
                     

Exercisable, June 30, 2010

   12,208,774         $65.85           
                     

Available for additional grant, June 30, 2010 1

   7,307,473                 
                   

1 Includes 3,568,383 shares available to be issued as restricted stock.

 

The following table presents information on stock options by ranges of exercise price at June 30, 2010:

(Dollars in thousands except per share data)

 

    Options Outstanding   Options Exercisable
Range of Exercise
Prices
  Number
Outstanding at
June 30, 2010
  Weighted
Average
Exercise Price
 

Weighted

Average
Remaining
  Contractual Life  
(Years)

  Total
  Aggregate  
Intrinsic
Value
  Number
    Exercisable at    
June 30, 2010
  Weighted
Average
Exercise Price
  Weighted
Average
Remaining
Contractual
  Life (Years)  
  Total
  Aggregate  
Intrinsic
Value
                             
$9.06 to 49.46   5,591,128    $16.11    8.27    $52,530    477,958    $43.13    2.29    $461 
$49.47 to 64.57   4,743,326    56.43    1.87      4,743,326    56.43    1.87   
$64.58 to 150.45   7,967,690    72.66    4.45      6,987,490    73.80    4.00   
                             
  18,302,144    $51.18    4.95    $52,530    12,208,774    $65.85    3.11    $461 
                               

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

 

         Three Months Ended    
June 30
       Six Months Ended    
June  30
(Dollars in thousands)    2010    2009    2010    2009

Stock-based compensation expense:

           

Stock options

   $3,496    $3,565    $7,105    $6,478

Restricted stock

   9,953    15,994    22,221    36,277
                   

Total stock-based compensation expense

   $13,449    $19,559    $29,326    $42,755
                   

The recognized stock-based compensation tax benefit amounted to $5 million and $7 million for the three months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, the recognized stock-based compensation tax benefit was $11 million, and $16 million, respectively.

Retirement Plans

SunTrust did not contribute to either of its noncontributory qualified retirement plans (“Retirement Benefits” plans) in the first six months of 2010. The expected long-term rate of return on plan assets for the Retirement Benefit Plans is 8.00% for 2010.

Anticipated employer contributions/benefit payments for 2010 are $12 million for the Supplemental Retirement Benefit plans. For the three and six months ended June 30, 2010, the actual contributions/benefit payments totaled $1 million and $4 million, respectively.

SunTrust contributed less than $1 million to the Postretirement Welfare Plan in the second quarter of 2010. Additionally, SunTrust expects to receive a Medicare Part D Subsidy reimbursement for 2010 in the amount of $2 million. The expected pre-tax long-term rate of return on plan assets for the Postretirement Welfare plan is 6.75% for 2010.

 

 

     Three Months Ended June 30
     2010    2009
(Dollars in thousands)    Pension
      Benefits      
   Other
  Postretirement  
Benefits
   Pension
      Benefits      
   Other
  Postretirement  
Benefits

Service cost

   $17,331      $-      $15,967      $73  

Interest cost

   32,007      2,436      29,898      2,803  

Expected return on plan assets

   (45,723)     (1,806)     (37,288)     (1,758) 

Amortization of prior service cost

   (2,792)     (95)     (2,721)     (390) 

Recognized net actuarial loss

   15,027      245      28,013      4,648  
                   

Net periodic benefit cost

   $15,850      $780      $33,869      $5,376  
                   
     Six Months Ended June 30
     2010    2009
(Dollars in thousands)    Pension
Benefits
   Other
Postretirement
Benefits
   Pension
Benefits
   Other
Postretirement
Benefits

Service cost

   $34,662      $-      $34,825      $146  

Interest cost

   64,014      4,872      59,961      5,606  

Expected return on plan assets

   (91,446)     (3,612)     (74,846)     (3,516) 

Amortization of prior service cost

   (5,584)     (190)     (5,442)     (780) 

Recognized net actuarial loss

   30,054      490      60,469      9,296  
                   

Net periodic benefit cost

   $31,700      $1,560      $74,967      $10,752  
                   

During March 2010, a comprehensive health care reform legislation was signed into law under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Acts”). Included among the major provisions of the law is a change in tax treatment of the federal drug subsidy paid with respect to Medicare-eligible retirees. The Company has evaluated the cost of the healthcare reform legislation for which guidance has been issued and the impact is not expected to be material. The Company will continue to monitor and assess the effect of the Acts as further guidance is issued.

 

Derivative Financial Instruments
Derivative Financial Instruments

Note 10 - Derivative Financial Instruments

The Company enters into various derivative financial instruments, both in a dealer capacity to facilitate client transactions and as an end user as a risk management tool. Where derivatives have been entered into with clients, the Company generally manages the risk associated with these derivatives within the framework of its 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. The Company may also enter into derivatives, on a limited basis, in consideration of trading opportunities in the market. In addition, as a normal part of its operations, the Company enters into IRLCs on mortgage loans that are accounted for as freestanding derivatives and has certain contracts containing embedded derivatives that are carried, in their entirety, at fair value. All freestanding derivatives and any embedded derivatives that the Company bifurcates from the host contracts 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 OCI, 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 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, 2010, the net derivative asset positions to which the Company was exposed to risk of its counterparties was $2.2 billion, representing the net of $3.3 billion in net 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. As of December 31, 2009, the net derivative asset positions to which the Company was exposed to risk of its counterparties was $1.8 billion, representing the net of $2.5 billion in derivative gains by counterparty, netted by counterparty where formal netting arrangements exist, adjusted for collateral of $0.7 billion that the Company holds in relation to these gain positions.

The Company adjusted the fair value of its net derivative asset position for estimates of counterparty credit risk by $28 million and $25 million as of June 30, 2010 and December 31, 2009, respectively. See Note 13, “Fair Value Measurement and Election,” to the Consolidated Financial Statements for further discussion on quantification of counterparty credit risk.

The majority of the Company’s 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 at net 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, certain of the Company’s derivative liability positions, totaling $1.2 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 ATE that permits the counterparties to close-out net and apply collateral or, where a 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, 2010, the Bank carried senior long-term debt ratings of BBB+/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 total fair value of $20 million at June 30, 2010, against which the Bank had posted collateral of $10 million; ATEs do not exist at lower ratings levels. At June 30, 2010, $1.2 billion in fair value of derivative liabilities are subject to CSAs, against which the Bank has posted $1.1 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 $29 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 $17 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, 2010. 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, 2010. On the Consolidated Balance Sheets, the fair values of derivatives with counterparties with master netting agreements are recorded on a net basis. 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. For contracts constituting a combination of options that contain a written option and a purchased option (such as a collar), the notional amount of each option is presented separately, with the purchased notional amount being presented as an Asset Derivative and the written notional amount being presented as a Liability Derivative. The fair value of a combination of options is presented as a single value with the purchased notional amount if the combined fair value is positive, and with the written notional amount if the combined fair value is negative.

 

    

As of June 30, 2010

 
    

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 5

            

Equity contracts hedging:

               

Securities available for sale

  

Trading assets

   $1,546,752        $127,216     

Trading liabilities

   $1,546,752        $-     

Interest rate contracts hedging:

               

Floating rate loans

  

Trading assets

   16,350,000        1,091,056         -          -       
                             

Total

      17,896,752        1,218,272         1,546,752        -       
                             

Derivatives not designated as hedging instruments 6

            

Interest rate contracts covering:

               

Fixed rate debt

  

Trading assets

   2,923,085        289,842     

Trading liabilities

   295,000        32,838     

Corporate bonds and loans

      -          -       

Trading liabilities

   44,575        4,138     

MSRs

  

Other assets

   23,370,000        359,332     

Other liabilities

   2,255,000        74,537     

LHFS, IRLCs, LHFI-FV

  

Other assets

   3,718,910   3    15,591     

Other liabilities

   4,942,200        71,216     

Trading activity

  

Trading assets

   108,992,754   1    4,346,524     

Trading liabilities

   95,736,330        4,286,213     

Foreign exchange rate contracts covering:

               

Foreign-denominated debt and commercial loans

      -          -       

Trading liabilities

   1,467,481        216,199     

Trading activity

  

Trading assets

   1,727,824        81,195     

Trading liabilities

   1,767,455        72,737     

Credit contracts covering:

               

Loans

  

Trading assets

   115,000        811     

Trading liabilities

   177,000        1,743     

Trading activity

  

Trading assets

   737,334   2    10,856     

Trading liabilities

   704,328   2    6,329     

Equity contracts - Trading activity

  

Trading assets

   3,679,709   1    408,978     

Trading liabilities

   7,191,552        509,733     

Other contracts:

               

IRLCs and other

  

Other assets

   5,573,013        87,401     

Other liabilities

   155,320   4    34,321   4 

Trading activity

  

Trading assets

   79,082        6,243     

Trading liabilities

   91,497        6,081     
                             

Total

      150,916,711        5,606,773         114,827,738        5,316,085     
                             

Total derivatives

      168,813,463        $6,825,045         116,374,490        $5,316,085     
                             

1 Amounts include $28.1 billion and $0.5 billion 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 $1 million and $9 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 Amount includes $1.4 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.

4Includes a $34 million derivative liability recorded in other liabilities in the Consolidated Balance Sheets, related to a notional amount of $134 million. This derivative was established upon the sale of Visa Class B shares in the second quarter of 2009 as discussed in Note 11, "Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements.

5See “Cash Flow Hedges” in this Note for further discussion.

6See “Economic Hedging and Trading Activities” in this Note for further discussion.

 

The table below presents the Company’s derivative positions at December 31, 2009.

 

    As of December 31, 2009  
    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 5

  

 

Equity contracts hedging:

           

Securities available for sale

  Trading assets   $1,546,752        $-     Trading liabilities   $1,546,752        $45,866     

Interest rate contracts hedging:

           

Floating rate loans

  Trading assets   15,550,000        865,391     Trading liabilities   3,000,000        22,202     
                         

Total

    17,096,752        865,391       4,546,752        68,068     
                         

Derivatives not designated as hedging instruments 6

  

Interest rate contracts covering:

           

Fixed rate debt

  Trading assets   3,223,085        200,183     Trading liabilities   295,000        10,335     

Corporate bonds and loans

    -            -         Trading liabilities   47,568        4,002     

MSRs

  Other assets   3,715,000        61,719     Other liabilities   3,810,000        57,048     

LHFS, IRLCs, LHFI-FV

  Other assets   7,461,935   3    75,071     Other liabilities   1,425,858        20,056     

Trading activity

  Trading assets   94,139,597   1    3,289,667     Trading liabilities   83,483,088        3,242,861     

Foreign exchange rate contracts covering:

           

Foreign-denominated debt and commercial loans

  Trading assets   1,164,169        96,143     Trading liabilities   656,498        144,203     

Trading activity

  Trading assets   2,059,097        107,065     Trading liabilities   2,020,240        96,266     

Credit contracts covering:

           

Loans

  Trading assets   115,000        771     Trading liabilities   240,750        4,051     

Trading activity

  Trading assets   170,044   2    6,344     Trading liabilities   156,139   2    3,837     

Equity contracts - Trading activity

  Trading assets   3,344,875   1    446,355     Trading liabilities   6,907,657        672,221     

Other contracts:

           

IRLCs and other

  Other assets   1,870,040        13,482     Other liabilities   1,560,337   4    48,134   4 

Trading activity

  Trading assets   39,117        7,095     Trading liabilities   51,546        6,929     
                         

Total

    117,301,959        4,303,895       100,654,681        4,309,943     
                         

Total derivatives

          $134,398,711              $5,169,286             $105,201,433              $4,378,011     
                         

1 Amounts include $18.2 billion and $0.5 billion 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 $4 million and $9 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.

3Amount includes $2.0 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.

4Includes a $40 million derivative liability recorded in other liabilities in the Consolidated Balance Sheets, related to a notional amount of $134 million. This derivative was established upon the sale of Visa Class B shares in the second quarter of 2009 as discussed in Note 11, "Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements.

5See “Cash Flow Hedges” in this Note for further discussion.

6See “Economic Hedging and Trading Activities” in this Note 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, 2010 and 2009 are presented below. The impacts are segregated between those derivatives that are designated in hedging relationships 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, qualifying hedging relationships.

 

 

     Three Months Ended June 30, 2010

(Dollars in thousands)

Derivatives in cash flow hedging relationships

       Amount of pre-tax gain recognized  
in OCI on Derivatives (Effective  
Portion)
     Classification of gain reclassified  
from AOCI into Income
(Effective Portion)
   Amount of pre-tax gain
   reclassified from AOCI into  
Income (Effective Portion)1

Equity contracts hedging:

        

Securities available for sale

   $105,931        

Interest rate contracts hedging:

        

Floating rate loans

   447,355      Interest and fees on loans    $124,203  
            

Total

   $553,286         $124,203  
            
     Six Months Ended June 30, 2010

(Dollars in thousands)

Derivatives in cash flow hedging relationships

   Amount of pre-tax  gain/(loss)
recognized in OCI on Derivatives
(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

   $166,519        

Interest rate contracts hedging:

        

Floating rate loans

   735,406      Interest and fees on loans    $251,076  
            

Total

   $901,925         $251,076  
            

 

(Dollars in thousands)

Derivatives not designated as hedging
instruments

  

Classification of gain/(loss)

recognized in Income on Derivatives

   Amount of gain/(loss)  recognized
in Income on Derivatives for the
three months ended June 30, 2010
   Amount of gain/(loss) recognized  in
Income on Derivatives for the six
months ended June 30, 2010

Interest rate contracts covering:

        

Fixed rate debt

   Trading account profits/(losses) and commissions    $79,676     $125,097 

Corporate bonds and loans

   Trading account profits/(losses) and commissions    (471)    (1,203)

MSRs

   Mortgage servicing related income    392,325     468,668 

LHFS, IRLCs, LHFI-FV

   Mortgage production related income    (140,079)    (209,913)

Trading activity

   Trading account profits/(losses) and commissions    (23)    29,780 

Foreign exchange rate contracts covering:

        

Foreign-denominated debt and commercial loans

   Trading account profits/(losses) and commissions    (106,439)    (202,070)

Trading activity

   Trading account profits/(losses) and commissions    18,920     25,884 

Credit contracts covering:

        

Loans

   Trading account profits/(losses) and commissions    1,082     739 

Trading activity

   Trading account profits/(losses) and commissions    3,452     3,834 

Equity contracts - trading activity

   Trading account profits/(losses) and commissions    (920)    5,884 

Other contracts:

        

IRLCs

   Mortgage production related income    118,666     210,822 

Trading activity

   Trading account profits/(losses) and commissions    122     144 
            

Total

      $366,311     $457,666 
            

1 During the three and six months ended June 30, 2010, the Company reclassified $24 million and $53 million, respectively, in pre-tax gains from AOCI into net interest income. These gains related to hedging relationships that have been previously terminated or de-designated.

 

 

     Three Months Ended June 30, 2009

(Dollars in thousands)

 

Derivatives in 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 CDs

   (672)     Interest on deposits    (22,239) 
            

Total

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

(Dollars in thousands)

 

Derivatives in 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 CDs

   (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

   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 bonds 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 $8 million and $16 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, CDS, swap participations, and TRS. The Company accounts for these contracts as derivative instruments and, accordingly, records these contracts at fair value, with changes in fair value recorded in trading account profits/(losses) 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, 2010, 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 generally of high creditworthiness and typically have ISDA master 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, 2010, the Company does not have any significant risk of making a non-recoverable payment on any written CDS. During 2010 and 2009, 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, 2010, the written CDS had remaining terms ranging from six months to five years. The maximum guarantees outstanding at June 30, 2010 and December 31, 2009, as measured by the gross notional amounts of written CDS, were $128 million and $130 million, respectively. At June 30, 2010 and December 31, 2009, the gross notional amounts of purchased CDS contracts, which represent benefits to, rather than obligations of, the Company, were $117 million and $185 million, respectively. The fair values of the written CDS were $1 million and $2 million at June 30, 2010 and December 31, 2009, respectively, and the fair values of the purchased CDS were $4 million at both June 30, 2010, and December 31, 2009.

The Company writes risk 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 risk 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. To date, no material losses have been incurred related to the Company’s written swap participations. At June 30, 2010, the remaining terms on these risk participations generally ranged from one month to eight years, with a weighted average on the maximum estimated exposure of 3.1 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 $84 million and $83 million at June 30, 2010 and December 31, 2009, respectively. The fair values of the written swap participations were de minimis at June 30, 2010 and December 31, 2009. 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 mitigated 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. The Company temporarily suspended this business and unwound its positions as of December 31, 2009 without incurring losses. Trading resumed during 2010 and at June 30, 2010, there were $594 million of outstanding and offsetting TRS notional balances. The fair values of the TRS derivative assets and liabilities were $6 million and $4 million at June 30, 2010, respectively, and related collateral held at June 30, 2010 was $246 million.

 

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 may employ various interest rate derivatives as risk management tools to hedge interest rate risk from recognized assets and liabilities or from forecasted transactions. The terms and notional amounts of derivatives are determined based on management’s assessment of future interest rates, as well as other factors. The Company 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, 2010, the Company’s only outstanding interest rate hedging relationships involve interest rate swaps that have been designated as cash flow hedges of probable forecasted transactions related to recognized floating rate loans.

Interest rate swaps have been designated as hedging the exposure to the benchmark interest rate risk associated with floating rate loans. The maximum range of hedge maturities for hedges of floating rate loans is one to five years, with the weighted average being 3.4 years. Ineffectiveness on these hedges was de minimis during the six months ended June 30, 2010. As of June 30, 2010, $345 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 on these hedged items.

During the third quarter of 2008, the Company executed The Agreements on 30 million common shares of Coke. A consolidated subsidiary of SunTrust owns 22.9 million Coke common shares and a consolidated subsidiary of the Bank owns 7.1 million Coke common shares. These two subsidiaries entered into separate derivative contracts 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 were zero-cost equity collars at inception, which caused the Agreements to be derivatives in their entirety. 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 between 6.5 and 7 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 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 treatment 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/(losses) 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. Ineffectiveness was de minimis during the three months ended June 30, 2010. The Company recognized $7 million of ineffectiveness gains during the six months ended June 30, 2010 and $4 million in ineffectiveness gains during both the three and six months ended June 30, 2009, which was recorded in trading account profits/(losses) and commissions. Other than potential measured hedge ineffectiveness, no amounts are expected to 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 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 in this footnote.

 

 

   

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

 

  ¡  

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

 

  ¡  

The Company is exposed to interest rate risk associated with MSRs, which the Company hedges with a combination of derivatives, including MBS forward and option contracts, and interest rate swap and swaption contracts. At January 1, 2010, the Company elected fair value for MSRs previously accounted for at LOCOM which resulted in an increase in associated hedging activity during the current year.

 

  ¡  

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 LHFS, and mortgage loans held for investment reported at fair value.

 

   

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 with 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 are both recorded within trading account profits/(losses) and commissions.

 

   

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

 

   

Trading activity, in the tables in this footnote, primarily includes 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 or in connection with specific hedges and, therefore, the Company does not specifically associate individual derivatives with specific assets or liabilities.

Reinsurance Arrangements and Guarantees
Reinsurance Arrangements and Guarantees

Note 11 – Reinsurance Arrangements and Guarantees

Reinsurance

The Company provides mortgage reinsurance on certain mortgage loans through contracts with several primary mortgage insurance companies. Under these contracts, the Company provides aggregate excess loss coverage in a mezzanine layer in exchange for a portion of the pool’s mortgage insurance premium. As of June 30, 2010, approximately $14.1 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, 2010, the total loss exposure ceded to the Company was approximately $628 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 million. Of this amount, $274 million of losses have been reserved for as of June 30, 2010, reducing the Company’s net remaining loss exposure to $4 million. To date, actual claims paid by the trusts have been limited as claims paid by the mortgage insurance companies have been delayed as a result of elongated foreclosure timelines. 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. Future reported losses may exceed $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 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 $10 million and $20 million for the three and six months ended June 30, 2010, respectively and $13 million and $26 million for the three and six months ended June 30, 2009, respectively, are reported as part of noninterest income. The related provision for losses, which totaled $9 million and $18 million for the three and six months ended June 30, 2010, respectively and $25 million and $95 million for the three and six months ended June 30, 2009, respectively, is reported as part of noninterest expense.

Guarantees

The Company has undertaken certain guarantee obligations in the ordinary course of business. The issuance of a guarantee imposes an obligation for the Company to stand ready to perform, and 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, 2010. In addition, the Company has entered into certain contracts that are similar to guarantees, but that are accounted for as derivatives (see Note 10, “Derivative Financial Instruments,” to the Consolidated Financial Statements).

Visa

The Company issues and acquires credit and debit card transactions through Visa. 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 Visa’s restructuring in 2007, 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. Since 2008, Visa has funded $5.3 billion into an escrow account, established for the purpose of funding judgments in, or settlements of, the Litigation. Agreements associated with Visa’s 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 Visa’s 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.

In May 2009, the Company sold its 3.2 million shares of Class B Visa Inc. common stock to another financial institution (“the Counterparty”) and entered into a derivative with the Counterparty. The Company received $112 million and recognized a gain of $112 million in connection with these transactions. Under the derivative, 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. 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. 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 $34 million recorded as of June 30, 2010.

Letters of Credit

Letters of credit are conditional commitments issued by the Company generally to guarantee the performance of a client to a third party in borrowing arrangements, such as CP, bond financing, 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.

As of June 30, 2010 and December 31, 2009, the maximum potential amount of the Company’s obligation was $7.1 billion and $8.9 billion, respectively, for financial and performance standby letters of credit. The Company has recorded $115 million and $131 million in other liabilities for unearned fees related to these letters of credit as of June 30, 2010 and December 31, 2009, 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 Company is not a party. In all cases, the Company 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. The associated reserve is a component of the unfunded commitment reserve recorded in other liabilities included in the allowance for credit losses as disclosed in Note 4, “Allowance for Credit Losses,” to the Consolidated Financial Statements.

Loan Sales

STM, a consolidated subsidiary of SunTrust, originates and purchases residential mortgage loans, a portion of which are sold to outside investors in the normal course of business. When mortgage loans 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, up to 25 to 30 years. Subsequent to the sale, if an inadvertent underwriting deficiency or documentation defect is discovered, STM may be obligated to reimburse the investor for losses incurred or to repurchase the mortgage loan if such deficiency or defect cannot be cured by STM within the specified period following discovery. STM’s risk of loss under its representations and warranties is largely driven by borrower payment performance since investors will perform extensive reviews of delinquent loans as a means of mitigating losses.

STM maintains a liability for this loss contingency, which is initially based on the estimated fair value of the Company’s contingency at the time loans are sold and the guarantee liability is created. Subsequently, STM estimates losses that have been incurred and increases the liability if estimated incurred losses exceed the guarantee liability. As of June 30, 2010 and December 31, 2009, the liability for contingent losses related to sold loans totaled $256 million and $200 million, respectively. The following table summarizes the changes in the Company’s reserve for mortgage loan repurchase losses.

 

         Three Months Ended    
June 30
       Six Months Ended    
June 30
(Dollars in thousands)    2010    2009    2010    2009

Balance at beginning of period

   $209,613     $93,191      $199,856     $91,780  

Provision

   148,331     62,461      275,875     88,352  

Charge-offs

   (102,320)    (63,460)     (220,107)    (87,940) 
         

Balance at end of period

   $255,624     $92,192      $255,624     $92,192  
         

During the six months ended June 30, 2010 and 2009, SunTrust repurchased or otherwise settled mortgages with balances of $375 million and $197 million, respectively, related to investor demands. As of June 30, 2010 and December 31, 2009, the carrying value of outstanding repurchased mortgage loans, exclusive of any allowance for loan losses, totaled $170 million and $146 million, respectively, of which $114 million and $98 million, respectively, were nonperforming.

STM also maintains a liability for contingent losses related to MSR sales, which totaled $2 million and $3 million as of June 30, 2010 and December 31, 2009, 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 January 1, 2009 are not recorded as liabilities; whereas arrangements entered into subsequent to that date are recorded as liabilities. The potential obligation associated with these arrangements was $7 million and $13 million as of June 30, 2010 and December 31, 2009, respectively, of which $4 million was recorded as a liability representing the fair value of the contingent payments as of June 30, 2010 and December 31, 2009. If required, these contingent payments will be payable at various times over the next five years.

 

Public Deposits

The Company holds public deposits from 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 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; 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.

STIS and 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, 2010 and 2009, STIS and STRH experienced minimal net losses as a result of the indemnity. The clearing agreements expire in May 2015 for both STIS and STRH.

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, 2010, 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, 2010, the maximum potential amount that SunTrust Community Capital could be obligated to pay under these guarantees is $39 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, 2010 and December 31, 2009, $8 million and $9 million was accrued representing the remainder of tax credits to be delivered, and were recorded in other liabilities on the Consolidated Balance Sheets.

Concentrations of Credit Risk
Concentrations of Credit Risk

Note 12 - Concentrations of Credit Risk

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

 

Credit risk associated with these concentrations could arise when a significant amount of loans, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment to be adversely affected. The Company does not have a significant concentration of risk to any individual client except for the U.S. government and its agencies. The major concentrations of credit risk for the Company arise by collateral type in relation to loans and credit commitments. The only significant concentration that exists is in loans secured by residential real estate. At June 30, 2010, the Company owned $46.6 billion in residential mortgage loans and home equity lines, representing 41% of total loans, $2.8 billion of residential construction loans, representing 3% of total loans, and an additional $14.4 billion in commitments to extend credit on home equity lines and $12.8 billion in mortgage loan commitments. At December 31, 2009, the Company had $46.7 billion in residential mortgage loans and home equity lines, representing 41% of total loans, $3.8 billion of residential construction loans, representing 3% of total loans and an additional $15.2 billion in commitments to extend credit on home equity lines and $12.2 billion in mortgage loan commitments. The Company originates and retains certain residential mortgage loan products that include features such as interest only loans, high LTV loans, and low initial interest rate loans. As of June 30, 2010, the Company owned $14.2 billion of interest only loans, primarily with a 10 year interest only period. Approximately $1.9 billion of those loans had combined original LTV ratios in excess of 80% with no mortgage insurance. Additionally, the Company owned approximately $3.0 billion of amortizing loans with combined original LTV 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 $472 million and $572 million as of June 30, 2010 and December 31, 2009, respectively.

Fair Value Measurement and Election
Fair Value Measurement and Election

Note 13 - Fair Value Measurement and Election

The Company carries certain assets and liabilities at fair value on a recurring basis and appropriately classifies them as level 1, level 2 or level 3 within the fair value hierarchy. The Company’s recurring fair value measurements are based on a requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain financial assets and financial liabilities at fair value. Assets and liabilities that are required to be carried at fair value on a recurring basis include trading securities, securities AFS, and derivative financial instruments. Assets and liabilities that the Company has elected to carry at fair value on a recurring basis include certain loans and LHFS, MSRs, certain brokered deposits, and certain issuances of fixed rate debt.

In certain circumstances, fair value enables a company to more accurately align its financial performance with the economic value of actively traded or hedged assets or liabilities. Fair value also enables a company to mitigate the non-economic earnings volatility caused from financial assets and financial liabilities being carried at different bases of accounting, as well as to more accurately portray the active and dynamic management of a company’s balance sheet. In cases where the Company believed that fair value was more representative of the results of its activities, the Company elected to carry certain financial instruments at fair value, as discussed further herein.

The classification of an instrument as level 3 versus level 2 involves judgment and is based on a variety of subjective factors. A market is considered “inactive” if 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 nature of the market participants, 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.

Beginning January 1, 2010, the Company changed its policy for recording transfers into and out of the fair value hierarchy levels in response to amended U.S. GAAP. All such transfers are now assumed to be as of the end of the quarter in which the transfer occurred, whereas, previously, the Company assumed transfers into levels to occur at the beginning of the quarter and transfers out of levels to occur at the end of the quarter. None of the transfers into or out of level 3 have been the result of using alternative valuation approaches to estimate fair values.

 

Recurring Fair Value Measurements

 

          Fair Value Measurements at
June 30, 2010
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 securities

   $360,217      $360,217      $-      $-     

Federal agency securities

   482,014      -      482,014      -     

U.S. states and political subdivisions

   52,004      -      42,576      9,428     

RMBS - agency

   230,455      -      230,455      -     

RMBS - private

   3,510      -      -      3,510     

CDO securities

   116,844      -      -      116,844     

ABS

   48,605      -      276      48,329     

Corporate and other debt securities

   641,501      -      641,501      -     

Commercial paper

   59,904      -      59,904      -     

Equity securities

   217,918      1,993      95,959      119,966     

Derivative contracts

   3,039,885      106,348      2,806,321      127,216     

Trading loans

   912,945      -      912,945      -     
                     

Total trading assets

   6,165,802      468,558      5,271,951      425,293     
                     

Securities available for sale

           

U.S. Treasury securities

   5,352,154      5,352,154      -      -     

Federal agency securities

   954,376      -      954,376      -     

U.S. states and political subdivisions

   859,184      -      734,513      124,671     

RMBS - agency

   16,198,823      -      16,198,823      -     

RMBS - private

   365,361      -      -      365,361     

ABS

   922,889      -      815,039      107,850     

Corporate and other debt securities

   504,191      -      499,191      5,000     

Common stock of The Coca-Cola Company

   1,503,600      1,503,600      -      -     

Other equity securities

   937,782      212      232,440      705,130   3  
                     

Total securities available for sale

   27,598,360      6,855,966      19,434,382      1,308,012     
                     

Loans held for sale

           

Residential loans

   2,218,383      -      2,114,552      103,831     

Corporate and other loans

   306,087      -      301,012      5,075