SunTrust 2005 Annual Report Download - page 98

SUNTRUST  ANNUAL REPORT96
NOTE  • Guarantees
The Company has undertaken certain guarantee obligations in the ordinary
course of business. In following the provisions of FIN , the Company must
consider guarantees that have any of the following four characteristics: (i)
contracts that contingently require the guarantor to make payments 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 agreement; (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 liabil-
ity, or an equity security of the indemnified party; and (iv) indirect guaran-
tees of the indebtedness of others. The issuance of a guarantee imposes an
obligation for the Company to stand ready to perform, and should certain
triggering events occur, it also imposes an obligation to make future pay-
ments. Payments may be in the form of cash, financial instruments, other
assets, shares of stock, or provisions of the Company’s services. The fol-
lowing is a discussion of the guarantees that the Company has issued as of
December ,  and , which have characteristics as specified by
FIN .
LETTERS OF CREDIT
Letters of credit are conditional commitments issued by the Company gen-
erally to guarantee the performance of a client to a third party in borrow-
ing 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 clients and may be
reduced by selling participations to third parties. The Company issues let-
ters 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 .
As of December ,  and December , , the maximum
potential amount of the Company’s obligation was . billion and .
billion, respectively, for financial and performance standby letters of credit.
The Company has recorded . million and . million in other lia-
bilities for unearned fees related to these letters of credit as of December
,  and December , , respectively. The Company’s outstand-
ing 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 client’s
underlying line of credit. If the client’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 busi-
ness combination transactions. Payments are calculated using certain
post-acquisition performance criteria. The potential liability associated
with these arrangements was approximately . million and .
million as of December ,  and December , , respectively. As
contingent consideration in a business combination is not subject to the
recognition and measurement provisions of FIN , the Company currently
has no amounts recorded for these guarantees as of December , .
If required, these contingent payments would be payable within the next
four years.
OTHER
In the normal course of business, the Company enters into indemnifica-
tion agreements and provides standard representations and warranties in
connection with numerous transactions. These transactions include those
arising from underwriting agreements, merger and acquisition agreements,
loan sales, contractual commitments, and various other business transac-
tions or arrangements. The extent of the Company’s obligations under these
indemnification agreements 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 are guaranteed to have a liquidation value
equal to the sum of the issue price, . million, and an approximate yield
of .% per annum subject to reduction for any cash or property dividends
paid to date. As of December ,  and December , , .
million and . million was accrued in other liabilities for the principal
and interest, respectively. 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  years from the February ,  date of issu-
ance of the Series B Preferred Stock.
SunTrust Investment Services, Inc. (“STIS”) and SunTrust Capital
Markets, Inc. (“STCM”), broker-dealer affiliates of SunTrust, use a common
third party clearing broker to clear and execute their clients’ securities trans-
actions and to hold clients’ accounts. Under their respective agreements,
STIS and STCM agree to indemnify the clearing broker for losses that result
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued