SunTrust 2003 Annual Report Download - page 86

84 SunTrust Banks, Inc. Annual Report 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
As of December 31, 2003 and December 31, 2002, the
maximum potential amount of the Company’s obligation was
$9.7 billion and $9.2 billion, respectively, for financial and per-
formance standby letters of credit. The Company has recorded
$93.8 million in other liabilities for unearned fees related to
these letters of credit as of December 31, 2003. The Company’s
outstanding letters of credit generally have a term of less than
one year. If a letter of credit is drawn upon, the Company may
seek recourse through the customer’s underlying line of credit. If
the customer’s line of credit is also in default, the Company may
take possession of the collateral securing the line of credit.
CONTINGENT CONSIDERATION
The Company has contingent payment obligations related to
certain business combination transactions. Payments are calcu-
lated using certain post-acquisition performance criteria. At
December 31, 2003, the maximum potential liability associated
with these arrangements was approximately $33.4 million.
OTHER
In the normal course of business, the Company enters into
indemnification agreements and provides standard representa-
tions and warranties in connection with numerous transactions.
These transactions include those arising from underwriting
agreements, merger and acquisition agreements, loan sales, and
various other business transactions or arrangements. The extent
of the Company’s obligations under these indemnification agree-
ments depends upon the occurrence of future events; therefore,
the Company’s potential future liability under these arrange-
ments is not determinable.
Third party investors hold Series B Preferred Stock in STB
Real Estate Holdings (Atlanta), Inc. (STBREH), a subsidiary of
SunTrust. The contract between STBREH and the third party
investors contains an automatic exchange clause which, under
certain circumstances, requires the Series B preferred shares to
be automatically exchanged for guaranteed preferred beneficial
interest in debentures of the Company. The guaranteed preferred
beneficial interest in debentures is guaranteed to have a liquida-
tion value equal to the sum of the issue price, $350 million, and
an approximate yield of 8.5% per annum subject to reduction for
any cash or property dividends paid to date. As of December 31,
2003 and December 31, 2002, $412.5 and $377.5 million is
accrued in other liabilities for the principal and interest, respec-
tively. This exchange agreement remains in effect as long as any
shares of Series B Preferred Stock are owned by the third party
investors, not to exceed 30 years.
SunTrust Securities, Inc. (STS) and SunTrust Capital Markets,
Inc. (STCM), 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, STS and STCM 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 STS and STCM have no maximum amount, the Company
believes that the maximum potential obligation cannot be esti-
mated. However, to mitigate exposure, the affiliate may seek
recourse from the customer through cash or securities held in the
defaulting customer’s account. For the years ended December 31,
2003 and 2002, STS and STCM experienced minimal net losses
as a result of the indemnity. The clearing agreements expire in
2004 for STS and 2005 for STCM.
SunTrust Bank has guarantees associated with credit default
swaps, an agreement in which the buyer of protection pays a pre-
mium to the seller of the credit default swap for protection against
an event of default. Events constituting default under such agree-
ments that would result in the Company making a guaranteed
payment to a counterparty may include (i) default of the referenced
asset; (ii) bankruptcy of the customer; or (iii) restructuring or reor-
ganization by the customer. The notional amount outstanding at
December 31, 2003 and December 31, 2002 is $195.0 million
and $175.0 million, respectively. As of December 31, 2003, the
notional amounts expire as follows: $45.0 million in 2004,
$15.0 million in 2005, $0.0 in 2006, $20.0 million in 2007,
$90.0 million in 2008, and $25.0 million in 2009. In the event
of default under the contract, the Company would make a cash
payment to the holder of credit protection and would take delivery
of the referenced asset from which the Company may recover a
portion of the credit loss.
NOTE 19 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 or certain regions of the country. Credit risk asso-
ciated with these concentrations could arise when a significant
amount of loans, related by similar characteristics, are simultane-
ously 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 to any individ-
ual client except for the U.S. government and its agencies. The
major concentrations of credit risk for the Company arise by collat-
eral type in relation to loans and credit commitments. The only
significant concentration in loans by collateral type that exists is in
loans secured by residential real estate. At December 31, 2003,
the Company had $24.2 billion in residential real estate loans,
representing 29.9% of total loans, and an additional $7.8 billion
in commitments to extend credit on such loans. 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 outstandings were $513.6 mil-
lion as of December 31, 2003.