SunTrust 2004 Annual Report Download - page 100

98 SUNTRUST 2004 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
loans serviced with recourse as of December 31, 2004, is insured by
governmental agencies and private mortgage insurance firms.
WHEN-ISSUED SECURITIES
The Company enters into transactions involving “when-issued secu-
rities.”When-issued securities are commitments to purchase or sell
securities authorized for issuance but not yet actually issued.
Accordingly, they are not recorded on the balance sheet until issued.
Risks arise from the possible inability of counterparties to meet the
terms of their contracts and from movements in securities values
and interest rates. As of December 31, 2004, the Company did not
have any commitments to purchase or sell when-issued securities.
VARIABLE INTEREST ENTITIES AND OFF-BALANCE SHEET
ARRANGEMENTS
SunTrust assists in providing liquidity to select corporate customers
by directing them to a multi-seller commercial paper 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.The result is a favorable
funding arrangement for these SunTrust clients.
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 pro-
visions 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. As of
March 31, 2004, the Company adopted all the provisions of FIN
46(R), and the adoption did not have a material impact on the
Company’s financial position or results of operations.
On March 1, 2004, Three Pillars was restructured through the
issuance of a subordinated note to a third party. Under the terms of
the subordinated note, the holder of the note will absorb the major-
ity of Three Pillars’ expected losses.The subordinated note investor
therefore is Three Pillars’ primary beneficiary, and thus the Company
is not required to consolidate Three Pillars. Due to the issuance of
the subordinated note, the Company deconsolidated Three Pillars
effective March 1, 2004. As of December 31, 2004,Three Pillars had
assets and liabilities not included on the Consolidated Balance
Sheet of approximately $3.4 billion, consisting of primarily secured
loans, marketable asset-backed securities and short-term commer-
cial paper liabilities. As of December 31, 2003, Three Pillars had
assets and liabilities of approximately $3.2 billion which were
included in the Consolidated Balance Sheet.
Activities related to the Three Pillars relationship generated fee rev-
enue for the Company of approximately $24.2 million, $21.3 mil-
lion, and $16.4 million for the years ended December 31, 2004,
2003, and 2002, respectively.These activities include: client refer-
rals 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 tempo-
rary liquidity arrangements that would provide funding to Three
Pillars in the event it can no longer issue commercial paper or in cer-
tain other circumstances.
As of December 31, 2004, off-balance sheet liquidity commitments
and other credit enhancements made by the Company to Three
Pillars totaled $5.9 billion and $548.7 million, respectively, which
represent the Company’s maximum exposure to potential loss.The
Company manages the credit risk associated with these commit-
ments by subjecting them to the Company’s normal credit approval
and monitoring processes.
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 credits for these
limited partner investments. Partnership assets of approximately
$884.2 million and $731.8 million in partnerships where SunTrust is
only a limited partner were not included in the Consolidated
Balance Sheets at December 31, 2004 and 2003, respectively.The
Company’s maximum exposure to loss for these partnerships at
December 31, 2004 was $198.1 million, consisting of the limited
partnership investments plus unfunded commitments.
SunTrust is the managing general partner of a number of non-regis-
tered investment limited partnerships which have been established
to provide alternative investment strategies for its customers. In
reviewing the partnerships for consolidation, SunTrust determined
that these were voting interest entities and accordingly considered
the consolidation guidance contained in SOP 78-9, “Accounting for
Investments in Real Estate Ventures.” Under the terms of SunTrust’s
non-registered investment limited partnerships, the limited part-
nerships have certain rights, such as those specifically indicated in
SOP 78-9 (including the right to remove the general partner, or
“kick-out rights”). As such, SunTrust, as the general partner, is pre-
cluded from consolidating the limited partnerships under the provi-
sions of SOP 78-9.
Note 18 / GUARANTEES
The Company has undertaken certain guarantee obligations in the
ordinary course of business. In following the provisions of FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees” (FIN 45), the Company must con-
sider 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 fac-
tor that is related to an asset, a liability, or an equity security of the
guaranteed party; (ii) contracts that contingently require the guar-
antor to make payments to a guaranteed party based on another
entity’s failure to perform under an obligating agreement; (iii)
indemnification agreements that contingently require the indemni-
fying party to make payments to an indemnified party based on
changes in an underlying factor that is related to an asset, a liability,