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SunTrust Banks, Inc., 2008 Annual Report

Table of contents

  • Page 1
    SunTrust Banks, Inc., 2008 Annual Report

  • Page 2
    ... retail branches and 2,582 ATMs are located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia. In addition, SunTrust provides clients with a full selection of technology-based banking channels including online, 24-hour customer...

  • Page 3
    ...of managing capital resources to provide strength and stability against uncertainty as well as to support growth initiatives, we completed three separate transactions to optimize our long-term holdings of The Coca-Cola Company ("Coke") common stock. These Coke-related transactions increased SunTrust...

  • Page 4
    .... SunTrust 2008 Annual Report 2 Improving Profitability while Managing Risk To improve profitability, higher margin, higher risk-adjusted return products and services are targeted for growth, while lower-return assets and higher-cost deposits are being reduced. Increasing commercial loans...

  • Page 5
    ... 2008, mitigating credit risk took on increased urgency. The focus was on the subsets of loan portfolios under the most significant stress, notably related to residential real estate. Regarding home equity lines, for example, origination through third-party channels was eliminated, loan-to-value...

  • Page 6
    ...Williams Retired Partner Crowell & Moring, L.L.P. Washington, DC 2, 4 David H. Hughes Hughes Supply, Inc. Orlando, Florida 3, 5 Former Chairman of the Board Dr. Phail Wynn, Jr. 4, 5 Vice President, Durham and Regional Affairs Duke University Durham, North Carolina SunTrust 2008 Annual Report

  • Page 7
    ..., President, and Chief Executive Officer, Mid-Atlantic Banking Group Retail Line of Business Executive 39 years of service Mark A. Chancy Corporate Executive Vice President Chief Financial Officer and Corporate and Investment Banking Executive 20 years of service SunTrust 2008 Annual Report

  • Page 8
    ... SunTrust Bank, Augusta · SunTrust Bank, Middle Georgia · SunTrust Bank, Savannah · SunTrust Bank, Southeast Georgia · SunTrust Bank, West Georgia · SunTrust Bank, South Georgia Memphis Region 6 · SunTrust Bank, Memphis Nashville Region · SunTrust Bank, Nashville Florida Group Central Florida...

  • Page 9
    ... SunTrust Bank, Nature Coast · SunTrust Bank, Pinellas County · SunTrust Bank, South Pinellas County Mid-Atlantic Group Central Carolina Region · SunTrust Bank, Durham · SunTrust Bank, Greensboro · SunTrust Bank, Wilmington Central Virginia Region · SunTrust Bank, Central Virginia · SunTrust...

  • Page 10
    ... income. 2 In this report, SunTrust presents a return on average assets less net unrealized securities gains and return on average realized equity which exclude realized and unrealized securities gains/losses and dividends from The Coca-Cola Company. The foregoing numbers primarily reï¬,ect...

  • Page 11
    ...the fiscal year ended December 31, 2008 or ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-08918 SUNTRUST BANKS, INC. (Exact name of registrant as specified in its charter) Georgia (State or other jurisdiction of incorporation or...

  • Page 12
    ... Item 15: Directors and Executive Officers of the Registrant. Executive Compensation. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Certain Relationships and Related Transactions. Principal Accountant Fees and Services. Exhibits, Financial Statement...

  • Page 13
    ...mortgage banking, asset management, securities brokerage, capital market services and credit-related insurance. SunTrust enjoys strong market positions in some of the most attractive markets in the United States and operates primarily within Florida, Georgia, Maryland, North Carolina, South Carolina...

  • Page 14
    ..., and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. The Federal Deposit Insurance Corporation Improvement Act of 1991...

  • Page 15
    ... issued, the term of the debt expressed in years and 100 basis points. With respect to the transaction account guarantee program, the FDIC insures the funds in all non-interest bearing transactional accounts greater than $250,000 until December 31, 2009. The FDIC assesses a quarterly annualized fee...

  • Page 16
    ... compliance programs. Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to...

  • Page 17
    ... Officer, on its website. These corporate governance materials are also available free of charge in print to shareholders who request them in writing to: SunTrust Banks, Inc., Attention: Investor Relations, P.O. Box 4418, Mail Code GA-ATL-634, Atlanta, Georgia 30302-4418. The Company's Annual Report...

  • Page 18
    ...housing market over the past two years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write...

  • Page 19
    ...accounts because market developments, including the increase of failures in the banking industry, have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. Treasury "Stress Tests" and Other Actions may Adversely Affect Bank Operations and Value...

  • Page 20
    ...mortgage loan originations and profits on sales of mortgage loans. Declining real estate prices have caused higher delinquencies and losses on certain mortgage loans, particularly Alt-A mortgages and home equity lines of credit and mortgage loans sourced from brokers that are outside our branch bank...

  • Page 21
    ... the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. They can also materially decrease the value of financial assets we hold, such as debt securities and mortgage servicing rights ("MSRs"). Its policies can...

  • Page 22
    ... in any number of activities, including lending practices, the failure of any product or service sold by us to meet our clients' expectations or applicable regulatory requirements, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in...

  • Page 23
    ... products and services on less advantageous terms to retain or attract clients, or be subject to cost increases. We may not pay dividends on your common stock. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available...

  • Page 24
    ... and the related effects on local economies may increase our credit losses, which would negatively affect our financial results. We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of...

  • Page 25
    ... a sufficient number of qualified employees or if the costs of employee compensation or benefits increase substantially. Our accounting policies and processes are critical to how we report our financial condition and results of operations. They require management to make estimates about matters...

  • Page 26
    ... 2007 and 2008, we recorded market valuation losses related to securities that we purchased from certain money market funds managed by our subsidiary RidgeWorth as well as Three Pillars Funding, LLC ("Three Pillars"), a multi-seller commercial paper conduit sponsored by us. At the time of purchase...

  • Page 27
    ... affect our financial condition, capital adequacy, and results of operations. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES The Company's headquarters is located in Atlanta, Georgia. As of December 31, 2008, SunTrust Bank owned 578 of its 1,692 full-service banking offices and leased...

  • Page 28
    ... OF EQUITY SECURITIES The principal market in which the common stock of the Company is traded is the New York Stock Exchange ("NYSE"). See Item 6 and Table 18 in the MD&A for information on the high and the low sales prices of the SunTrust Banks, Inc. common stock on the NYSE, which is incorporated...

  • Page 29
    ...for loan and lease losses Consumer and commercial deposits Brokered and foreign deposits Long-term debt Total shareholders' equity Financial Ratios and Other Data Return on average total assets Return on average total assets less net realized and unrealized securities gains and the Coca-Cola Company...

  • Page 30
    ...and results of operations; changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital or liquidity; the fiscal and monetary policies of the federal government and its agencies could...

  • Page 31
    ... and our headquarters are located in Atlanta, Georgia. Our principal banking subsidiary, SunTrust Bank, offers a full line of financial services for consumers and businesses through its branches located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and...

  • Page 32
    ... to improve efficiency and productivity, although expenses continue to be pressured by increased credit-related costs. We solidified our capital position during the year through the preferred stock issuance discussed above and also completed three separate transactions to optimize our long-term...

  • Page 33
    ... obtaining lower funding costs through growth in customer deposits. The "Live Solid. Bank Solid." brand compliments the "My Cause" deposit campaign, which ended in October 2008. During 2008, "My Cause" generated total household deposit growth of approximately 8%, with checking account households...

  • Page 34
    ... loan and lease losses Cash and due from banks Other assets Noninterest earning trading assets Unrealized net gains on securities available for sale, net Total assets Liabilities and Shareholders' Equity Interest-bearing deposits: NOW accounts Money market accounts Savings Consumer time Other time...

  • Page 35
    ... NOW accounts Money market accounts Savings Consumer time Other time Brokered deposits Foreign deposits Funds purchased Securities sold under agreements to repurchase Interest-bearing trading liabilities Other short-term borrowings Long-term debt Total interest expense Net change in net interest...

  • Page 36
    ....9 $2,303.0 Service charges on deposit accounts Trust and investment management income Retail investment services Other charges and fees Card fees Investment banking income Trading account profits/(losses) and commissions Mortgage production related income Mortgage servicing related income/(expense...

  • Page 37
    ... to market losses on illiquid trading securities acquired during the fourth quarter of 2007 as a result of the continuing declines in home values and increasing consumer real estate delinquency levels, which affected liquidity and technical pricing in the broader market during the year related to...

  • Page 38
    ...in Coke common stock, refer to "Investment in Common Shares of The Coca-Cola Company" within this MD&A. During the fourth quarter of 2007, we completed multiple sale/leaseback transactions, consisting of over 300 of our branch properties and various individual office buildings. In total, we sold and...

  • Page 39
    ... 39.8 219.2 $3,400.6 Employee compensation Employee benefits Total personnel expense Outside processing and software Operating losses Marketing and customer development Net occupancy expense Equipment expense Mortgage reinsurance Credit and collection services Amortization/impairment of intangible...

  • Page 40
    ... income, state tax benefits resulting from subsidiaries' net operating losses and tax credits for the year ended December 31, 2008. Additionally, in July 2008, we contributed 3.6 million shares of Coke common stock to our SunTrust Foundation. This contribution resulted in a release of the deferred...

  • Page 41
    ...the disruption in the short-term corporate funding markets during the second half of 2008, resulting in certain commercial and large corporate clients accessing bank lines for funding. As such, beginning in the third quarter of 2008 in particular, we experienced an increase in the utilization levels...

  • Page 42
    ... states: Florida (29.9%), Georgia (15.2%), Virginia (10.5%), and California (8.0%). The core mortgage portfolio was $23.2 billion, or 18.2% of total loans, as of December 31, 2008 and deteriorated somewhat due to current market conditions. Delinquency levels of 60 days or more increased to 2.6% as...

  • Page 43
    ... loans. Student loans, which are mostly government supported, made up $2.9 billion, or 55.4%, of the direct consumer portfolio. This portfolio also consists of loans and lines to individuals for personal or family uses. The decrease in loans held for sale from December 31, 2007 to December 31, 2008...

  • Page 44
    ... net charge-offs Net charge-offs to average loans Provision to average loans Recoveries to total charge-offs 1 2 1.86 % 61.7 1.50 x 1.25 % 1.97 6.9 Amount removed from the ALLL related to our election to record $4.1 billion of residential mortgages at fair value. During the second quarter of 2008...

  • Page 45
    ... mortgage, home equity, and residential construction portfolios and is primarily resulting from decreasing home prices and borrower credit deterioration. The ALLL recorded for commercial loans was $631.2 million, or 1.5% of the commercial loans, an increase of $208.6 million in 2008. The increase...

  • Page 46
    ...resulting deterioration in credit conditions of the residential mortgage, construction, and home equity portfolios. Net charge-offs for 2008 were $1,141.5 million higher than net charge-offs recorded in 2007. Net charge-offs to average loans were 1.25% in 2008 compared to 0.35% in 2007. The increase...

  • Page 47
    ... of total nonperforming loans. The second quarter 2008 GB&T acquisition accounted for $229.5 million of the increase in nonperforming assets. The increases in nonperforming assets is largely related to the housing correction and related decline in the values of residential real estate. As loans work...

  • Page 48
    ... in home prices could result in additional losses on these properties. The amount of net inflows into OREO has increased over the past several quarters as nonperforming loans are worked through the foreclosure process. Most of our OREO properties are located in Georgia, California and Florida...

  • Page 49
    ... were $2.3 billion, or 1.8% of total loans, at December 31, 2008 which represents a 28 basis point increase from December 31, 2007. SELECTED FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Adoption of Fair Value Accounting Standards During the first quarter of 2007, we evaluated the provisions of SFAS...

  • Page 50
    ... market valuation loss of $63.8 million as a result of the purchase. We evaluated this transaction under the applicable accounting guidance and concluded that we were not the primary beneficiary and therefore consolidation of the Fund was not appropriate. In September 2008, the Federal Reserve Bank...

  • Page 51
    ... asset-backed commercial paper ("ABCP") from certain money market mutual funds (the "MMMF"). These purchases will be made by the participating institution at a price equal to the MMMF's amortized cost. The Fed will then make a fixed rate non-recourse loan to the participating institution that will...

  • Page 52
    ... decline in the yield on available for sale securities in the first quarter of 2009 due to the timing of the net purchase of lower-yielding MBS issued by federal agencies in late December. In addition, should we experience an increase in prepayments on these newly acquired MBS during the first...

  • Page 53
    ... to support the accuracy of the judgments made by management in estimating the value of illiquid securities. Beginning in the first quarter of 2008, management established a level 3 valuation working group to evaluate the available information pertaining to certain securities and ultimately develop...

  • Page 54
    ... of multiple sources of information, including broker quotes, values provided by pricing services, trading activity in other similar securities, market indices, and internal cash flow and pricing matrix estimates. Participation on this working group includes the business or functional area that...

  • Page 55
    ...equity securities, and ABS collateralized by student loans or trust preferred bank obligations. Under a functioning ARS market, ARS could be remarketed with tight interest rate caps to investors targeting short-term investment securities that repriced generally every 7 to 28 days. Unlike other short...

  • Page 56
    ... mortgage securities, as described previously, to fair value the loans. We recognized $90.4 million and $15.6 million in net losses through earnings during the years ended December 31, 2008 and 2007, respectively, related to level 3 loans and loans held for sale, excluding IRLCs. During the years...

  • Page 57
    ... a third party pricing service and utilizing broker quotes to corroborate the reasonableness of those market values. In addition, information from market data of recent observable trades and indications from buy side investors, if available, are taken into consideration as additional support for the...

  • Page 58
    ...as we were prohibited from including the market value of our investment in Coke common shares in Tier 1 Capital in accordance with Federal Reserve capital adequacy rules. Executed Multi-Step Strategy As we reported in connection with our financial results for the quarter ended June 30, 2007, we sold...

  • Page 59
    ..., the Agreements resulted in an increase in Tier 1 Capital during the third quarter of approximately $728 million or an estimated 43 basis points as of the transaction date. DEPOSITS Table 13 - Composition of Average Deposits Year Ended December 31 (Dollars in millions) Percent of Total 2008 18...

  • Page 60
    ... of incentive plans to place greater emphasis on deposit and package account sales, enhancing online banking products, and partnering with other well known brands in deposit oriented promotions. We also significantly improved our pricing process and product structure in 2008, which provided...

  • Page 61
    ... of the transaction date. See additional discussion in "Investment in Common Shares of the Coca-Cola Company" in this MD&A for further discussion. In the fourth quarter of 2008, we participated in the Treasury's Capital Purchase Program by issuing $4.9 billion in preferred stock and related warrants...

  • Page 62
    ...earnings caused largely by an increased provision for loan losses during 2008. In connection with the issuances of the Series A Preferred Stock of SunTrust Banks, Inc., the Fixed to Floating Rate Normal Preferred Purchase Securities of SunTrust Preferred Capital I, the 6.10% Enhanced Trust Preferred...

  • Page 63
    ... risk managers, who report on a dotted line to the Chief Operational Risk Officer, facilitate communications with corporate risk functions and execute the requirements of the enterprise risk management framework and policies. Corporate Risk Management works in partnership with the risk managers to...

  • Page 64
    ... also report indirectly to the Chief Operational Risk Officer and are responsible for execution of the Operational Risk Management program within their areas. Market Risk Management Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices...

  • Page 65
    ... able to provide daily analysis using updated market information, thus enhancing the risk management process. For these reasons, cash flow sensitivity analysis of trading securities and securities available for sale, issued public debt securities, derivatives, residential mortgage loans, home equity...

  • Page 66
    ... strategies. The remainder of our actively traded securities, other than corporate treasury trading securities, are primarily held to support customer requirements through our broker/dealer subsidiary. Product offerings to clients include debt securities, loans traded in the secondary market, equity...

  • Page 67
    ...of our loan loss reserves, the liquidity profile of both the Bank and the parent company, and the adequacy of our capital base. On January 27, 2009, Standard & Poor's Rating Services lowered, by one rating, its long-term counterparty credit ratings on SunTrust Banks, Inc. to 'A' and SunTrust Bank to...

  • Page 68
    ...market value, based on the 20-day average price prevailing at the time of issuance. The Treasury may transfer the preferred stock and warrants. Separately during the fourth quarter, the FDIC implemented the TLGP under which banks and financial institutions can issue senior, unsecured debt guaranteed...

  • Page 69
    ... as cash flow hedges of commercial loans. Represents interest rate swaps designated as cash flow hedges of floating rate certificates of deposit and FHLB advances. Represents the change in fair value of derivative financial instruments from inception to December 31, 2008 less any accrued interest...

  • Page 70
    ...commercial loans. Represents interest rate swaps designated as cash flow hedges of floating rate certificates of deposit and FHLB advances. Represents the change in fair value of derivative financial...are not incorporated in this table. The hedging activity for our mortgage loans held for sale is ...

  • Page 71
    ... rates between the time the customer locks in the rate on the anticipated loan and the time the loan is sold on the secondary market, which is typically 60-150 days. We manage interest rate risk predominantly with interest rate swaps, futures, and forward sale agreements, where the changes in value...

  • Page 72
    ...to purchase capital stock in the FHLB. In exchange, members take advantage of competitively priced advances as a wholesale funding source and access grants and low-cost loans for affordable housing and communitydevelopment projects, amongst other benefits. As of December 31, 2008, we held a total of...

  • Page 73
    ... $77,557 Time deposit Short-term borrowings1 Long-term debt 1 Operating lease obligations Capital lease obligations1 Purchase obligations2 Total 1 2 maturities1 Amounts do not include accrued interest. Includes contracts with a minimum annual payment of $5 million. As of December 31, 2008, our...

  • Page 74
    ... or for disclosure purposes in accordance with SFAS No. 107. Examples of these non-recurring uses of fair value include loans held for sale accounted for at the lower of cost or market, MSRs, OREO, goodwill, intangible assets, nonmarketable equity securities, and long-lived assets. Depending...

  • Page 75
    ..., Corporate and Investment Banking, Wealth and Investment Management, and Affordable Housing. Valuation Techniques In determining the fair value of our reporting units, we primarily use discounted cash flow analyses, which require assumptions about short and long-term net cash flow growth rates for...

  • Page 76
    ...estimated fair value of the reporting unit is below the carrying value of its equity. In the case of our fourth quarter of 2008 updated goodwill impairment evaluation, we determined that it was possible that the fair value of the Mortgage, Commercial Real Estate, and Corporate and Investment Banking...

  • Page 77
    .... Size and Characteristics of the Employee Population Pension cost is directly related to the number of employees covered by the plans, and other factors including salary, age, years of employment, and benefit terms. Effective January 1, 2008, retirement plan participants who were employed as of 65

  • Page 78
    ... benefit cost would decrease/ increase by approximately $11 million. Expected Long-term Rate of Return on Plan Assets Based on historical experience and market projection of the target asset allocation set forth in the investment policy for the Retirement Plans, the pre-tax expected rate of return...

  • Page 79
    ...-service banking offices ATMs Full-time equivalent employees Tier 1 capital ratio Total capital ratio Tier 1 leverage ratio Total average shareholders' equity to average assets Tangible equity to tangible assets Tangible common equity to tangible assets Book value per common share Market Price: High...

  • Page 80
    ... loan and lease losses Cash and due from banks Other assets Noninterest earning trading assets Unrealized gains on securities available for sale, net Total assets Liabilities and Shareholders' Equity Interest-bearing deposits: NOW accounts Money market accounts Savings Consumer time Other time Total...

  • Page 81
    ..., state tax benefits resulting from subsidiaries' net operating losses and tax credits. BUSINESS SEGMENTS We have four business segments used to measure business activities: Retail and Commercial, Wholesale, Wealth and Investment Management, and Mortgage with the remainder in Corporate Other and...

  • Page 82
    ... loan and deposit products to clients. PWM also includes SunTrust Investment Services which operates across our footprint and offers discount/online and full service brokerage services to individual clients. In addition, GenSpring provides family office solutions to ultra high net worth individuals...

  • Page 83
    ... banking; SunTrust Online, which handles customer phone inquiries and phone sales and manages the Internet banking functions; Human Resources, which includes the recruiting, training and employee benefit administration functions; Finance, which includes accounting, planning, tax, and treasury...

  • Page 84
    ... lines, credit card, student loans, and loans acquired in conjunction with the GB&T transaction was offset by an approximately $1.8 billion decline in average loan balances related to the migration of middle market clients from Retail and Commercial to Wholesale. Provision for loan losses increased...

  • Page 85
    ... charge-offs in corporate banking. Noninterest income increased $168.2 million, or 35.0%, primarily due to lower market valuation trading losses in structured products. In addition, increases in direct finance, loan syndications, credit-related fees, and fixed income sales and trading were partially...

  • Page 86
    ... of net gains from the sale of available for sale securities that were held in conjunction with our risk management strategies associated with economically hedging the value of MSRs. Total noninterest expense increased $509.1 million, or 61.8%, driven by increased credit-related expenses. Operating...

  • Page 87
    ... demand deposit accounts, money market, and savings, declined. Noninterest income decreased $39.7 million, or 1.1%, compared to 2006. The decrease was driven by $527.7 million of mark to market valuation losses related to the purchase of securities from (1) an institutional private placement fund...

  • Page 88
    ... losses primarily in structured products due to capital markets volatility created by turmoil in the mortgage industry, lack of loan liquidity, and widening credit spreads as well as increased Affordable Housing related noninterest expense, partially offset by lower provision expense. Net interest...

  • Page 89
    ... resulted primarily from $165.4 million in net valuation losses on mortgage loans held for sale due to market volatility and mortgage spread widening in conjunction with increased credit-related losses on mortgage loans. These losses were partially offset by higher mortgage servicing revenue. Net...

  • Page 90
    ...net market valuation gains recorded on trading assets and our long-term corporate debt carried at fair value. Noninterest income was also impacted by a $132.5 million market valuation write-down on securities consolidated in the third quarter of 2007 in anticipation of closing of Private Fund. Total...

  • Page 91
    ... of our return on equity because the excluded equity relates primarily to the holding of a specific security. The return on average realized common shareholders' equity is computed by dividing annualized net income available to common shareholders, excluding securities gains/losses and The Coca-Cola...

  • Page 92
    ...of our return on equity because the excluded equity relates primarily to the holding of a specific security. The return on average realized common shareholders' equity is computed by dividing annualized net income available to common shareholders, excluding securities gains/losses and The Coca -Cola...

  • Page 93
    ...rather than pursuant to publicly announced share repurchase programs. For the twelve months ended December 31, 2008, the following shares of SunTrust common stock were surrendered by participants in SunTrust's employee stock option plans: 1,952 shares in January 2008 at an average price per share of...

  • Page 94
    ... bonds Total debt securities Fair Value U.S. Treasury securities U.S. government-sponsored enterprises States and political subdivisions Asset-backed securities1 Mortgage-backed securities1 Corporate bonds Total debt securities Weighted average yield (FTE): U.S. Treasury securities U.S. government...

  • Page 95
    .... We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SunTrust Banks, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the...

  • Page 96
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 97
    ... of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting The Board of Directors and Shareholders of SunTrust Banks, Inc. We have audited SunTrust Banks, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in...

  • Page 98
    ... loan losses Noninterest Income Service charges on deposit accounts Trust and investment management income Other charges and fees Card fees Retail investment services Investment banking income Mortgage production related income Mortgage servicing related income/(loss) Trading account profits/(losses...

  • Page 99
    ... deposits in other banks Funds sold and securities purchased under agreements to resell Cash and cash equivalents Trading assets Securities available for sale1 Loans held for sale (loans at fair value: $2,424,432 as of December 31, 2008; $6,325,160 as of December 31, 2007) Loans (loans at fair value...

  • Page 100
    ... on securities, net of tax Change related to employee benefit plans Total comprehensive income Issuance of common stock for GB&T acquisition Common stock dividends, $2.85 per share Series A preferred stock dividends, $4,451.05 per share Issuance of U.S. Treasury preferred stock Accretion of discount...

  • Page 101
    ... of common stock of The Coca-Cola Company Depreciation, amortization and accretion Customer relationship intangible impairment Impairment of mortgage servicing rights Gain on sale of mortgage servicing rights Origination of mortgage servicing rights Provisions for loan losses and foreclosed property...

  • Page 102
    ... with its headquarters in Atlanta, Georgia. SunTrust's principal banking subsidiary, SunTrust Bank, offers a full line of financial services for consumers and businesses through its branches located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the...

  • Page 103
    ... residential mortgage loans, commercial loans, and student loans to a held for sale classification at the lower of cost or fair value. At the time of transfer, any credit losses are recorded as a reduction in the allowance for loan losses with subsequent losses as well as other interest rate related...

  • Page 104
    ...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 to seven years. Fees received for providing loan commitments that result in loans are deferred and...

  • Page 105
    ... the estimated fair value of the MSRs when loans are sold and the associated servicing rights are retained. Fair value is determined using models which depend on estimates of prepayment rates, discount rate and other valuation assumptions that are supported by market and economic data collected from...

  • Page 106
    ..., third-party market prices, market prices for similar assets, or discounted cash flow analyses. If market prices are not available, fair value is calculated using management's best estimates of key assumptions, including credit losses, loan repayment speeds and discount rates commensurate with...

  • Page 107
    ... the value associated with servicing of loans in the measurement of all written loan commitments issued after that date. The adoption, net of other changes in the valuation of IRLCs, resulted in the acceleration of $18.3 million in mortgage-related income during the first quarter of 2008. The...

  • Page 108
    ... fair value include certain loans held for sale accounted for on a lower of cost or market basis, MSRs, goodwill, and long-lived assets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at...

  • Page 109
    ...January 1, 2009. The adoption did not have a material impact on the Company's financial position and results of operations. In February 2008, the FASB issued FSP FAS 140-3, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The objective of the FSP is to...

  • Page 110
    ...in Note 11, "Certain Transfers of Financial Assets, Mortgage Servicing Rights, and Variable Interest Entities". In December 2008, the FASB issued FSP FAS 132(R) - 1 "Employers' Disclosures about Postretirement Benefit Plan Assets". The FSP requires that entities disclose the fair value of each major...

  • Page 111
    ...amortized cost and had a carryover reserve for loan and lease losses of $158.7 million. The acquisition was accounted for under the purchase method of accounting with the results of operations for GB&T included in SunTrust's results beginning May 1, 2008. Acquisition by GenSpring Family Offices, LLC...

  • Page 112
    ...and agency securities Corporate and other debt securities Equity securities Mortgage-backed securities Derivative contracts1 Total trading liabilities 1 Excludes IRLCs accounted for as derivatives, as well as derivatives economically hedging loans held for sale and loans reported at fair value. The...

  • Page 113
    ... securities Mortgage-backed securities Corporate bonds Common stock of The Coca-Cola Company Other securities1 Total securities available for sale 1 Includes $493.2 million and $452.2 million of Federal Home Loan Bank of Cincinnati and Federal Home Loan Bank of Atlanta stock stated at par value...

  • Page 114
    ... held certain investment securities having unrealized loss positions. Market changes in interest rates and credit spreads will result in temporary unrealized losses as the market price of securities fluctuates. The turmoil and illiquidity in the financial markets during 2008 increased market yields...

  • Page 115
    ...90 days or more were $1,032.3 million and $611.0 million, respectively, and increased primarily related to loans sold to Government National Mortgage Association that we have repurchased or have the right to repurchase which are guaranteed by U.S. government agencies. Loans individually evaluated in...

  • Page 116
    ..., in loans held for sale to loans held for investment in response to liquidity issues in the market with respect to these loans. The loans transferred included loans carried at fair value under SFAS No. 159 which continue to be reported at fair value while classified as held for investment, as...

  • Page 117
    ...value of a reporting unit below its carrying amount. In 2008, the Company's reporting units were comprised of Retail, Commercial, Commercial Real Estate, Mortgage, Corporate and Investment Banking, Wealth and Investment Management, and Affordable Housing. The Company completed its 2008 annual review...

  • Page 118
    ...changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2008 and 2007 are as follows: Wealth and Corporate Retail & Corporate and Investment Other and Commercial Commercial Wholesale Mortgage Management Treasury Investment $$5,780,742 (11,782) 143,030 $5,911...

  • Page 119
    ... in Lighthouse Investment Partners, LLC and a revenue-sharing agreement. This transaction resulted in a $7.9 million decrease in existing intangible assets and a new intangible asset of $32.0 million. During the third quarter of 2008, SunTrust purchased a credit card portfolio of loans including the...

  • Page 120
    SUNTRUST BANKS, INC. Notes to Consolidated Financial Statements (Continued) See Note 11, "Certain Transfers of Financial Assets, Mortgage Servicing Rights and Variable Interest Entities," to the Consolidated Financial Statements for discussion of the impairment reserve recorded with respect to MSRs ...

  • Page 121
    SUNTRUST BANKS, INC. Notes to Consolidated Financial Statements (Continued) Note 11 - Certain Transfers of Financial Assets, Mortgage Servicing Rights and Variable Interest Entities Certain Transfers of Financial Assets The Company has transferred residential and commercial mortgage loans, student ...

  • Page 122
    ... certain securities issued by the VIEs, the Company also acts as manager or servicer for these VIEs as well as other VIEs that are funds of commercial leveraged loans and high yield bonds. In order to manage the risk to the debt and equity holders and maximize potential returns, the manager of...

  • Page 123
    ... any support to these entities and its maximum exposure to loss at December 31, 2008 is limited to (1) the current positions held in trading securities with a fair value of $45.0 million and (2) the remaining securities expected to be purchased in conjunction with the ARS issue, which have a total...

  • Page 124
    ... 15,170 Total proceeds Gain/(loss) Cash flows on interests held Servicing or management fees (Dollars in thousands) Residential Mortgage Loans $496,500 1,100 148 1,579 Commercial Mortgage Loans $491,391 14,806 124 Year Ended December 31, 2006 Commercial and Corporate Student Loans Loans $1,054...

  • Page 125
    ... than 20% before the expected credit loss assumption would result in additional fair value changes. As of December 31, 2007 Weighted Average Life Prepayment Expected Fair Value (in years) Rate Credit Losses (Dollars in millions) Annual Discount Rate Commercial and Corporate Loans 1 Residual As of...

  • Page 126
    ... MSRs from certain of its sales or securitizations of residential mortgage loans. MSRs on residential mortgage loans are the Company's only class of servicing assets and are reported at amortized cost, net of any allowance for impairment losses. As of December 31, 2008, the Company had not elected...

  • Page 127
    ... conduit, Three Pillars Funding, LLC ("Three Pillars"). Three Pillars provides financing for direct purchases of financial assets originated and serviced by SunTrust's corporate clients. Three Pillars finances this activity by issuing A-1/P-1 rated commercial paper ("CP"). The result is a favorable...

  • Page 128
    ... by trade receivables and commercial loans, which collateralize 47% and 20%, respectively, of the outstanding commitments, as of December 31, 2008. Each transaction added to Three Pillars is typically structured to an implied 'A/A2' rating according to established credit and underwriting policies as...

  • Page 129
    ... 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...

  • Page 130
    ... and Guarantees," to the Consolidated Financial Statements. Community Development Investments As part of its community reinvestment initiatives, the Company invests almost exclusively throughout its footprint in multi-family affordable housing developments and other community development entities...

  • Page 131
    ...from losses attributable to operating deficits, construction deficits, and tax credit allocation deficits. The Company accounts for its limited partner interests in accordance with the provisions of EITF No. 94-1, "Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects...

  • Page 132
    ... Cash Management Money Market Fund at amortized cost plus accrued interest. The SunTrust-issued notes matured on June 30, 2008. RidgeWorth is the investment adviser to these funds. The Company took this action to protect investors in these funds from possible losses associated with these securities...

  • Page 133
    ... 2008 and 2007, respectively. Debt was extinguished in 2008 prior to the contractual repayment date. The Company recognized a net loss of $11.7 million as a result of the prepayment. Debt recorded at fair value. Government guaranteed debt issued under the FDIC's Temporary Liquidity Guarantee Program...

  • Page 134
    ...Restrictive provisions of several long-term debt agreements prevent the Company from creating liens on, disposing of, or issuing (except to related parties) voting stock of subsidiaries. Further, there are restrictions on mergers, consolidations, certain leases, sales or transfers of assets, minimum...

  • Page 135
    ... rights. On November 14, 2008, as part of the Capital Purchase Program established by the U.S. Department of the Treasury ("Treasury") under the Emergency Economic Stabilization Act of 2008 (the "EESA"), the Company entered into a Purchase Agreement with Treasury pursuant to which the Company issued...

  • Page 136
    ... aggregate redemption price does not exceed the aggregate net proceeds from such Qualified Equity Offerings. Any redemption is subject to the consent of the Board of Governors of the Federal Reserve. On December 31, 2008, as part of the Capital Purchase Program established by the Treasury under the...

  • Page 137
    ... common stock) or redeem, purchase or acquire any shares of its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement. In addition, if the Company increases its...

  • Page 138
    ... at federal statutory rate Increase (decrease) resulting from: Tax-exempt interest Dividends received deduction Dividends paid on employee stock ownership plan shares Charitable contribution Income tax credits, net State income taxes, net Dividends on subsidiary preferred stock Other Total income...

  • Page 139
    ... replaced with a one-time grant of restricted stock. The Long-Term Incentive ("LTI") Cash Plan became effective in 2008, and awards under the LTI Cash Plan cliff vest over a period of three years from the date of the award and are paid in cash. Compensation expense related to programs that have cash...

  • Page 140
    SUNTRUST BANKS, INC. Notes to Consolidated Financial Statements (Continued) under the Stock Plan. An employee or director has the right to vote the shares of restricted stock after grant unless and until they are forfeited. Compensation cost for restricted stock is equal to the fair market value of ...

  • Page 141
    ... to 150.45 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day of 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received...

  • Page 142
    ... and regulations. Noncontributory Pension Plans SunTrust maintains a funded, noncontributory qualified retirement plan covering employees meeting certain service requirements. The plan provides benefits based on salary and years of service. Effective January 1, 2008, Retirement Plan participants who...

  • Page 143
    ... ("VEBA"). SunTrust reserves the right to amend or terminate any of the benefits at any time. The SunTrust Benefits Plan Committee reviews and approves the assumptions for end-of-year measurement calculations. For 2008, the discount rate, salary scale, and health care cost trend rate were revised...

  • Page 144
    ... Benefit obligation, beginning of year Service cost Interest cost Plan participants' contributions Amendments Actuarial (gain)/loss Benefits paid Less federal Medicare drug subsidy Benefit obligation, end of year The accumulated benefit obligation for the Retirement Benefits at December 31, 2008...

  • Page 145
    ... their specific benefits to participants thereof. Rebalancing occurs on a periodic basis to maintain the target allocation, but normal market activity may result in deviations. At December 31, 2008 and 2007, there was no SunTrust common stock held in the Retirement Plans. The investment strategy for...

  • Page 146
    ...cumulative net losses are attributable to (1) lower discount rates for the past several years, (2) compensation increases have exceeded expectations, and (3) lower return on assets in 2008. As discussed previously, SunTrust reviews its assumptions annually to ensure they represent best estimates for...

  • Page 147
    ... return on plan assets Amortization of prior service cost Recognized net actuarial loss Amortization of initial transition obligation Other Net periodic benefit cost Weighted average assumptions used to determine net cost Discount rate2 Expected return on plan assets Rate of compensation increase...

  • Page 148
    ... the plan's funded status and cost. Assumed discount rates and expected returns on plan assets affect the amounts of net periodic benefit cost. A 25 basis point decrease in the discount rate or expected long-term return on plan assets would increase the Retirement Benefits net periodic benefit cost...

  • Page 149
    ... Options Total interest rate contracts Interest rate lock commitments Equity contracts Foreign exchange contracts Other derivative contracts Total derivatives contracts Credit-related arrangements Commitments to extend credit Standby letters of credit and similar arrangements Total credit-related...

  • Page 150
    SUNTRUST BANKS, INC. Notes to Consolidated Financial Statements (Continued) expense related to net settlements on interest rate swaps accounted for as fair value hedges. This hedging strategy resulted in trading losses from hedge ineffectiveness of $5.0 million for the year ended December 31, 2006. ...

  • Page 151
    ... Management segments, which provide income in cases of default. The Company also hedges overall price risk related to IRLCs, mortgage loans held for sale, and mortgage loans held for investment designated at fair value under SFAS No. 159. Fair value changes occur as a result of interest rate...

  • Page 152
    .... No losses were recorded in 2006. As noted above, the reserve for estimated losses incurred under its reinsurance contracts totaled $180.0 million at December 31, 2008. Our evaluation of the required reserve amount includes an estimate of claims to be paid by the trust related to loans in default...

  • Page 153
    .... A high degree of subjectivity was used in estimating the fair value of the guarantee obligation and the ultimate cost to the Company could be significantly higher or lower than the liability recorded as of December 31, 2008. Letters of Credit Letters of credit are conditional commitments issued by...

  • Page 154
    ... 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 December 31, 2008, the written CDS had remaining terms of approximately one to seven years. The maximum guarantees...

  • Page 155
    .... SunTrust Investment Services, Inc. ("STIS") and SunTrust Robinson Humphrey, Inc. ("STRH"), broker-dealer affiliates of SunTrust, use a common third party clearing broker to clear and execute their customers' securities transactions and to hold customer accounts. Under their respective agreements...

  • Page 156
    ...Capital, LLC ("SunTrust Community Capital"), a SunTrust subsidiary, previously obtained state and federal tax credits through the construction and development of affordable housing properties and continues to obtain state and federal tax credits through investments as a limited partner in affordable...

  • Page 157
    ... No. 133. As of December 31, 2008, the fair value of such fixed rate debt was comprised of $3.7 billion of fixed rate Federal Home Loan Bank advances and $3.5 billion of publicly-issued debt. The Company elected to record this debt at fair value in order to align the accounting for the debt with the...

  • Page 158
    ... defined product criteria. SunTrust chose to fair value these mortgage loans held for sale in order to eliminate the complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying economic changes in value of the loans and related hedge...

  • Page 159
    ...of structured investment vehicles ("SIVs"), and third party sales of securities, some of which could be large-scale. The Company's level 3 securities available for sale totals approximately $1.5 billion at December 31, 2008 and include certain municipal bond securities and Federal Home Loan Bank and...

  • Page 160
    ... from internal estimates, incorporating market data when available, of the value of the underlying collateral. The publicly-issued, fixed rate debt that the Company has elected to carry at fair value is valued by obtaining quotes from a third party pricing service and utilizing broker quotes to...

  • Page 161
    ... a closed loan. As a result of the adoption of SAB No. 109, beginning in the first quarter of 2008, servicing value was also included in the fair value of IRLCs. The fair value of MSRs is determined by projecting cash flows which are then discounted to estimate an expected fair value. The fair value...

  • Page 162
    ... in relation to U.S. Treasury rates, the capital structure of the security and level of subordination, or the rating on a security/obligor as defined by nationally recognized rating agencies. The assumptions used to estimate credit risk applied relevant information that a market participant would...

  • Page 163
    ...,784 19,603 Trading Account Profits and Commissions ($151,695) 7,686 (70,927) - Mortgage Production Related Income $81,5612 (1,712) - Assets Trading assets Securities available for sale Loans held for sale Loans Other assets3 Liabilities Brokered deposits Trading liabilities Long-term debt Other...

  • Page 164
    ... million impairment charge recorded during the second quarter of 2008. Fair Value Measurement at December 31, 2007, Using Quoted Prices In Active Markets for Identical Assets (Level 1) $- (Dollars in thousands) Loans Held for Sale 1 OREO2 Affordable Housing 2 1 2 Net Carrying Value $1,476,425 183...

  • Page 165
    ...are recorded in net securities gains/(losses). Amounts included in earnings are recorded in mortgage production related income. Amounts are generally included in mortgage production income except $4.2 million in the year ended December 31, 2008, related to loans acquired in the GB&T acquisition. The...

  • Page 166
    ... into closed loans Ending balance December 31, 2008 2 1 2 Amounts included in earnings are recorded in mortgage production related income. The amount of total gains/(losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to IRLCs still held at...

  • Page 167
    ... Trading assets Securities available for sale Loans held for sale Total loans Interest/credit adjustment Subtotal Market risk/liquidity adjustment Loans, net Financial liabilities Consumer and commercial deposits Brokered deposits Foreign deposits Short-term borrowings Long-term debt Trading...

  • Page 168
    ... into account in estimating fair values. (f) Fair values for foreign deposits, brokered deposits, short-term borrowings, and long-term debt are based on quoted market prices for similar instruments or estimated using discounted cash flow analysis and the Company's current incremental borrowing rates...

  • Page 169
    ... Family Offices LLC, Institutional Investment Solutions, and RidgeWorth Capital Management. In addition, the Company reports Corporate Other and Treasury, which includes the investment securities portfolio, longterm debt, end user derivative instruments, short-term liquidity and funding activities...

  • Page 170
    ...on various drivers (e.g., number of full-time equivalent employees and volume of loans and deposits). The recoveries for these allocations are in Corporate Other and Treasury. Sales and Referral Credits - Segments may compensate another segment for referring or selling certain products. The majority...

  • Page 171
    ... Noninterest expense Net income/(loss) before taxes Provision (benefit) for income taxes3 Net income 1 2 3 Net interest income is fully taxable-equivalent and is presented on a matched maturity funds transfer price basis for the line of business. Provision for loan losses represents net charge-offs...

  • Page 172
    ... 31, 2006 Unrealized net gain on securities Unrealized net gain on derivatives Change related to employee benefit plans Adoption of SFAS No. 159 Pension plan changes and resulting remeasurement Reclassification adjustment for realized gains and losses on securities Reclassification adjustment for...

  • Page 173
    ...-substantially all from SunTrust Bank Interest on loans Trading account losses and commissions Other income Total income Expense Interest on short-term borrowings Interest on long-term debt Employee compensation and benefits Service fees to subsidiaries Other expense Total expense Income before...

  • Page 174
    ... in subsidiary banks Interest-bearing deposits in other banks Cash and cash equivalents Trading assets Securities available for sale Loans to subsidiaries Investment in capital stock of subsidiaries stated on the basis of the Company's equity in subsidiaries' capital accounts: Banking subsidiaries...

  • Page 175
    ... Net (decrease)/increase in other short-term borrowings Redemption of real estate investment trust security Proceeds from the issuance of long-term debt Repayment of long-term debt Proceeds from the issuance of preferred stock Proceeds from the exercise of stock options Acquisition of treasury stock...

  • Page 176
    ... that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported on a timely basis. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded, as of December 31, 2008, that the Company's disclosure controls and...

  • Page 177
    ... "Policies and Procedures for Approval of Related Party Transactions," "Director Compensation," "Transactions with Related Persons, Promoters, and Certain Control Persons," and "Corporate Governance and Director Independence" in the Registrant's definitive proxy statement for its annual meeting...

  • Page 178
    .... 333- 29251). Assignment and Assumption Agreement between National Commerce Financial Corporation and SunTrust Banks, Inc., dated September 22, 2004, relating to Guarantee Agreement dated March 27, 1997, incorporated by reference to Exhibit 4.14 to Registrant's 2004 Annual Report on Form 10-K. 166...

  • Page 179
    ... National Commerce Financial Corporation and SunTrust Banks, Inc. relating to Trust Agreement dated March 27, 1997, incorporated by reference to Exhibit 4.15 to Registrant's 2004 Annual Report on Form 10-K. Indenture, dated as of October 25, 2006, between SunTrust Banks, Inc. and U.S. Bank National...

  • Page 180
    ..., and to Exhibit 10.12 to the Registrant's Current Report on Form 8-K filed January 7, 2009. National Commerce Financial Corporation Amended and Restated Long Term Incentive Plan, * and amendment effective November 13, 2006, incorporated by reference to Exhibit 4.7 to Registration Statement No. 333...

  • Page 181
    ..., 2007 National Commerce Financial Corporation Supplemental Executive Retirement Plan, and * amendments effective December 31, 2004, January 1, 2005 and November 14, 2006, incorporated by reference to Exhibit 10.3 to National Commerce Financial Corporation's 2001 Annual Report on Form 10- K (File No...

  • Page 182
    ... life insurance, incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. Letter Agreement with U.S. Treasury Department dated as of November 14, 2008 (including the Securities Purchase Agreement - Standard Terms), incorporated...

  • Page 183
    .... herewith) Certification of Chief Financial Officer and Corporate Executive Vice President pursuant to 18 (filed U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. herewith) Certain instruments defining rights of holders of long-term debt of the Registrant...

  • Page 184
    ...or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNTRUST BANKS, INC. By: /s/ James M. Wells III James M. Wells III Chairman and Chief Executive Officer Dated: March 2, 2009 POWER...

  • Page 185
    ... Jr. Dr. Phail Wynn, Jr. Title 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 2/10/2009 Director Date 173

  • Page 186
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  • Page 187
    ..., Atlanta, Georgia. Stock Trading SunTrust Banks, Inc. common stock is traded on the New York Stock Exchange under the symbol "STI." For Information Online, Visit Suntrust.Com: • 2008 Annual Report • Quarterly earnings releases • Press releases Quarterly Common Stock Prices...

  • Page 188
    SunTrust Banks, Inc., 303 Peachtree Street, Atlanta, Georgia 30308 www.suntrust.com