SunTrust 2003 Annual Report Download - page 38

36 SunTrust Banks, Inc. Annual Report 2003
MANAGEMENT’S DISCUSSION continued
another entity’s failure to perform under an obligating agree-
ment; (iii) indemnification agreements that contingently require
the indemnifying party to make payments to an indemnified
party based on changes in an underlying factor that is related to
an asset, a liability, or an equity security of the indemnified
party; and (iv) indirect guarantees of the indebtedness of others.
The issuance of these guarantees imposes an obligation to
stand ready to perform, and should certain triggering events
occur, it also imposes an obligation for the Company to make
future payments. Note 18 to the Consolidated Financial
Statements includes the annual required disclosures under
FIN 45.
In the normal course of business, the Company utilizes vari-
ous derivative and credit-related financial instruments to meet the
needs of customers and to manage the Company’s exposure to
interest rate and other market risks. These financial instruments
involve, to varying degrees, elements of credit and market risk in
excess of the amount recorded on the balance sheet in accordance
with accounting principles generally accepted in the United
States. SunTrust manages the credit risk of its derivatives by (i)
limiting the total amount of arrangements outstanding by an indi-
vidual counterparty; (ii) monitoring the size and maturity structure
of the portfolio; (iii) obtaining collateral based on management’s
credit assessment of the counterparty; (iv) applying uniform credit
standards maintained for all activities with credit risk; and (v)
entering into transactions with high quality counterparties that are
periodically reviewed by the Company’s Credit Committee. The
Company manages the market risk of its derivatives by establish-
ing and monitoring limits on the types and degree of risk that may
be undertaken. The Company continually measures market risk by
using a value-at-risk methodology. Note 17 to the Consolidated
Financial Statements includes additional information regarding
derivative financial instruments and Table 22 provides further
details with respect to SunTrust’s derivative positions.
As detailed in Table 18, the Company had $59.4 billion in
total commitments to extend credit at December 31, 2003 that
were not recorded on the Company’s balance sheet which included
$2.8 billion in interest rate lock commitments. Commitments to
extend credit are arrangements to lend to a customer who has com-
plied with predetermined contractual conditions. The Company
also had $9.8 billion at December 31, 2003 in letters of credit,
which primarily consisted of financial and performance standby
letters of credit that provide guarantees to a third party beneficiary
that the Company will fund or perform, respectively, if certain future
events occur. Of this, approximately $4.8 billion supports Variable
Rate Demand Obligations (VRDO) remarketed by SunTrust and
other agents. VRDOs are municipal securities that are typically
remarketed by the agent on a weekly basis. In the event that the
securities are unable to be remarketed, the Company would fund
under the letters of credit.
SunTrust also assists in providing liquidity to select corpo-
rate customers by directing them to SunTrust’s multi-seller
commercial paper conduit, Three Pillars. Three Pillars provides
financing for or direct purchases of financial assets originated and
serviced by SunTrust’s corporate customers. Three Pillars finances
this activity by issuing A-1/P-1 rated commercial paper. The result
is a favorable funding arrangement for these SunTrust customers.
As of December 31, 2002, accounting principles generally
accepted in the United States did not require the Company to
consolidate Three Pillars; however, in January 2003, the FASB
issued FIN 46, “Consolidation of Variable Interest Entities,”
which addressed the criteria for the consolidation of off-balance
sheet entities similar to Three Pillars. Under the provisions of FIN
46, SunTrust consolidated Three Pillars as of July 1, 2003; how-
ever, SunTrust is currently restructuring Three Pillars and expects
consolidation will no longer be required as of March 31, 2004.
As of December 31, 2003, Three Pillars had assets and
liabilities included on the Consolidated Balance Sheet of approx-
imately $3.2 billion, primarily consisting of secured loans,
marketable asset-backed securities and short-term commercial
paper liabilities. As of December 31, 2002, Three Pillars had
assets and liabilities of approximately $2.8 billion which were
not included in the Consolidated Balance Sheet.
For the year ended December 31, 2003, activities related to
the Three Pillars relationship generated approximately $21.3 million
in fee revenue for the Company. These activities include: client
referrals and investment recommendations to Three Pillars; the
issuing of a letter of credit, which provides partial credit protec-
tion to the commercial paper holders; and providing a majority of
the temporary liquidity arrangements that would provide funding
to Three Pillars in the event it can no longer issue commercial
paper or in certain other circumstances.
As part of its community reinvestment initiatives, the
Company invests in multi-family affordable housing properties
throughout its footprint as a limited and/or general partner. Assets
of approximately $723.8 million in partnerships where SunTrust
is only a limited partner are not included in the Consolidated
Balance Sheet. The Company’s maximum exposure to loss for
these partnerships is $179.6 million, consisting of the limited
partnership investments plus unfunded commitments.
In addition, the Company is also a general partner in a num-
ber of limited partnerships, which have been formed to provide
investment opportunities for certain SunTrust customers. Assets
under management, which are not included in the Consolidated
Balance Sheet, totaled $3.6 billion as of December 31, 2003.
In connection with certain acquisitions made by the
Company, the terms of the acquisition agreement provide for
deferred payments or additional consideration to minority interest
holders and others, based on certain post-acquisition performance
targets. Disclosure of the amount of contingent consideration
expected to be paid is included in Note 18 to the Consolidated
Financial Statements.