SunTrust 2003 Annual Report Download - page 85

Annual Report 2003 SunTrust Banks, Inc. 83
OTHER OFF-BALANCE SHEET ARRANGEMENTS
SunTrust assists in providing liquidity to select corporate cus-
tomers by directing them to SunTrust’s multi-seller commercial
paper conduit, Three Pillars. Three Pillars provides financing for
direct purchases of financial assets originated and serviced by
SunTrust’s corporate customers. Three Pillars finances this activ-
ity 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 No. 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.
In December 2003, the FASB issued a revision to FIN 46
(FIN 46(R)) which replaced the Interpretation issued in January
2003. FIN 46(R) is effective for reporting periods ending after
March 15, 2004. The Company will adopt FIN 46(R) for the
quarter ended March 31, 2004, and will continue to apply FIN
46 in the interim.
Three Pillars remains consolidated at December 31, 2003;
however, 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, consisting of primarily 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 mil-
lion 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 protection
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. The
Company receives affordable housing federal and state tax cred-
its for these limited partner investments. The partnerships are
considered variable interest entities (VIEs) under FIN 46, and
therefore, each partnership has been evaluated to determine the
Company’s level of variable interests. For the partnerships in
which SunTrust is the general partner, the Company consoli-
dated $425.1 million in assets during 2003.
Conversely, partnership assets of approximately $723.8 mil-
lion 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 mil-
lion, consisting of the limited partnership investments plus unfunded
commitments. The investments in these partnerships represent a
significant variable interest for the Company and will continue to
be accounted for under the equity method of accounting.
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.
FIN 46 did not require consolidation of these partnerships.
NOTE 18 GUARANTEES
The Company has undertaken certain guarantee obligations in
the ordinary course of business. In following the provisions of
FIN 45, as addressed in Note 1, the Company must consider
guarantees that have any of the following four characteristics (i)
contracts that contingently require the guarantor to make pay-
ments to a guaranteed party based on changes in an underlying
factor that is related to an asset, a liability, or an equity security
of the guaranteed party; (ii) contracts that contingently require
the guarantor to make payments to a guaranteed party based on
another entity’s failure to perform under an obligating 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 a guarantee imposes an obligation for the
Company to stand ready to perform, and should certain trigger-
ing 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 guaran-
tees that the Company has issued as of December 31, 2003,
which have characteristics as specified by FIN 45.
LETTERS OF CREDIT
Letters of credit are conditional commitments issued by the
Company generally to guarantee the performance of a customer
to a third party in borrowing arrangements, such as commercial
paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers and may be
reduced by selling participations to third parties. The Company
issues letters of credit that are classified as either financial
standby, performance standby or commercial letters of credit.
Commercial letters of credit are specifically excluded from the
disclosure and recognition requirements of FIN 45.