SunTrust 2004 Annual Report Download - page 48

46 SUNTRUST 2004 ANNUAL REPORT
MANAGEMENT’S DISCUSSION continued
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 primarily of 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 and $21.3
million for the years ended December 31, 2004 and 2003, respec-
tively.These activities include: client referrals and investment rec-
ommendations 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 of December 31, 2004, off-balance sheet liquidity commitments
made by the Company to Three Pillars totaled $5.9 billion and other
credit enhancements totaled $548.7 million.These represent the
Company’s maximum exposure to potential loss. The Company
manages the credit risk associated with these commitments by
subjecting them to the Company’s normal credit approval and mon-
itoring 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
Sheet 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
precluded from consolidating the limited partnerships under the
provisions of SOP 78-9.
CONTRACTUAL COMMITMENTS
In the normal course of business, the Company enters into certain
contractual obligations. Such obligations include obligations to
make future payments on debt and lease arrangements,contractual
commitments for capital expenditures, and service contracts.Table
16 summarizes the Company’s significant contractual obligations at
December 31, 2004, except for pension and postretirement benefit
plans, included in Note 16 to the Company’s Consolidated Financial
Statements.Additional information with respect to the obligations
presented in the table is included in the Notes to the Consolidated
Financial Statements.
EARNINGS AND BALANCE SHEET ANALYSIS
2003 VS.2002
OVERVIEW
Net income was $1,332.3 million in 2003, up slightly over the
$1,331.8 million earned in 2002. Diluted earnings per share were
$4.73 in 2003 and $4.66 in 2002. In 2002, the Company incurred
$39.8 million, or $0.14 per diluted share, in after-tax merger-related
expenses associated with the acquisition of the Florida banking
franchise of Huntington Bancshares, Inc. (Huntington-Florida).
Net interest income increased $82.1 million to $3,365.3 million in
2003, compared to $3,283.2 million in 2002.The increase was due
to higher volumes in the loan and securities portfolios in 2003, a
decline in mortgage prepayments, and a steepening yield curve in
the latter part of 2003.The net interest margin declined 33 basis
points to 3.08% in 2003 from 3.41% in 2002.The decrease in the
margin was attributed to multiple factors including a shift in the
Company’s balance sheet structure to a slightly asset sensitive posi-
tion in anticipation of rising rates that did not occur, and the larger
decrease in earning asset yields versus the decrease in liability
costs.Also contributing to the decline in the net interest margin was
the consolidation of Three Pillars, the Company’s multi-seller com-
mercial paper conduit, to comply with FIN 46 in the third quarter of
2003.The consolidation had a negative three basis point impact on
the margin.
Net charge-offs were $311.1 million, or 0.41%, of average loans for
2003, compared to $422.3 million, or 0.59%, of average loans for
2002.The Company benefited from a $110.3 million reduction in
commercial net charge-offs.The provision for loan losses decreased
$156.2 million, or 33.3%, from 2002 to 2003 due to credit quality
improvement in 2003.Also impacting the decline was a $45.3 mil-
lion increase to the 2002 provision to bring the acquired
Huntington-Florida loan portfolio into compliance with SunTrust’s
credit standards.