SunTrust 2006 Annual Report Download - page 31

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time of the 2006 earnings release, the Company had recorded a specific reserve which reflected
management’s best estimate of the expected loss based on information available at that time. In
February 2007, certain events occurred which resulted in a reduction of management’s estimate of the
net realizable amount of the loan. On February 23, 2007, the borrower signed a definitive agreement to
sell the majority of its assets, primarily customer contracts, to an unrelated third party at a value that was
less than previously estimated due in large part to a reduction in the borrower’s revenues after
December 31, 2006. As a result of the sale of the majority of the borrower’s assets, the large commercial
credit was partially repaid and the remainder of the Company’s exposure to this borrower was charged-
off. This resulted in an additional $40 million in provision for loan losses and a $68.8 million charge-
off.
SunTrust provided the financing to the purchaser. The Company believes the purchaser is financially
stable, and the new financing reflects market terms and conditions. The terms of the definitive sale
agreement include a component of contingent consideration of approximately $31 million, based on the
future performance of the purchased customer contracts. The performance period ends during the third
quarter of 2007. The contingent portion of the purchase was structured under a separate note. Since the
ultimate amount of repayment on this note is based on the future performance of the purchased customer
contracts, the note is classified as non accrual and the Company recorded a specific reserve based on the
estimated amount of consideration to be received. Nonperforming loans declined $130.5 million as a
result of the definitive agreement and new financing.
Management evaluated these events and determined that in accordance with generally accepted
accounting principles that it was necessary to reflect these revisions to the estimated net realizable
amount of the loan in its 2006 financial statements since these subsequent events occurred prior to the
filing of the Company’s 2006 Annual Report on Form 10-K. The revision to management’s estimate
subsequent to year end does not constitute a control deficiency. Rather, it is a reflection of the extremely
fluid nature of the workout activities associated with this large commercial credit and specific events
which took place subsequent to year end. All of the financial information included in the Company’s
2006 Annual Report on Form 10-K has been updated to reflect these revisions.
INTRODUCTION
SunTrust is headquartered in Atlanta, Georgia, and operates primarily within Florida, Georgia,
Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia. Within
the geographic footprint, SunTrust strategically operates under five business segments. These business
segments are: Retail, Commercial, Corporate and Investment Banking (“CIB”), Wealth and Investment
Management, and Mortgage.
Despite a challenging operating environment in 2006, which included fierce deposit competition and a
prolonged flat to inverted yield curve, SunTrust was able to grow diluted earnings per common share by
6.4% over 2005. Loans, deposits and our overall customer base continued to grow in 2006, which
reflects our intense focus on sales and client service. As the year progressed and market conditions
became increasingly difficult, we were able to overcome the negative impact the yield curve had on net
interest income with strong fee income growth and by ratcheting up expense control. The Company also
instituted an efficiency and productivity program in the second half of 2006 which we expect to yield
significant benefits over the next several years. The efficiency and productivity initiatives, coupled with
our sales and service focus and strong credit culture, provide momentum going into 2007 and beyond.
The following is a summary of the Company’s 2006 financial performance:
•Total revenue-FTE increased $407.3 million, or 5.2%, compared to 2005. Noninterest income
sources contributed $313.3 million, or 76.9% of the increase, led by strong mortgage production and
servicing income while net interest income-FTE contributed $93.9 million, or 23.1% of the increase.
18