SunTrust 2007 Annual Report Download - page 133

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2007 and December 31, 2006, Three Pillars had assets not included on the Company’s Consolidated
Balance Sheets of approximately $5.3 billion and $5.4 billion, respectively, consisting primarily of secured loans. Funding
commitments and outstanding receivables extended by Three Pillars to its customers totaled $7.7 billion and $4.6 billion,
respectively, as of December 31, 2007, almost all of which renew annually. Assets supporting those commitments have a
weighted average life of 2.18 years. The majority of the commitments are backed by trade receivables and commercial loans,
which collateralize 41% and 19%, respectively, of the outstanding commitments.
Each transaction added to Three Pillars is typically structured to an implied ‘A/A2’ rating according to established credit and
underwriting policies as approved by the Company’s credit risk management. Each transaction is monitored on a monthly
basis, or more frequently, to ensure compliance with each transaction’s terms and conditions. Typically, transactions contain
dynamic credit enhancement structures that provide increased credit protection in the event asset performance deteriorates. If
asset performance deteriorates beyond pre-determined covenant levels, the transaction could become ineligible for continued
funding by Three Pillars. This could result in the transaction being amended with the approval of the Company’s credit risk
management or being funded under the liquidity facility provided by the Company in connection with the transaction. In
addition, each commitment renewal requires credit risk management approval. During the year ended December 31, 2007,
there were no write-downs and no downgrades of Three Pillars’ assets; however, see the following discussion relating to the
liquidity commitments for trading losses taken by the Company for securities purchased from Three Pillars pursuant to those
arrangements.
At December 31, 2007, Three Pillars’ outstanding CP used to fund the above assets totaled $5.3 billion, with remaining
weighted-average lives of 25.6 days and maturities through April 9, 2008. Three Pillars has no other form of funding
outstanding as of December 31, 2007.
Beginning in the third quarter of 2007, the overall U.S. Asset-Backed Commercial Paper (“ABCP”) market experienced a
disruption which continued through the remainder of the year. Despite the continued ongoing disruptions in and contraction
of the CP market, Three Pillars experienced no significant difficulties in issuing its CP and has been able to place daily its
commercial paper in the third party CP market. During the third quarter of 2007, the Company, in its sole discretion, elected
to purchase a limited amount of Three Pillars’ CP although the Company was under no obligation, contractual or otherwise,
to do so. The aggregate face amount of Three Pillars’ issued commercial paper purchased in the third quarter totaled $775.1
million. The Three Pillars CP was classified on the Company’s Consolidated Balance Sheet as a trading asset and was
purchased at market rates ranging from 5.27% to 6.29%, with maturities ranging from 7 days to 27 days. This amount
represented less than 1% of Three Pillars’ total issuance for the year ended December 31, 2007. The Company’s purchase of
the commercial paper did not alter the Company’s conclusion that it was not Three Pillars’ primary beneficiary. The
Company holds no outstanding Three Pillars CP at December 31, 2007.
Three Pillars has an outstanding subordinated note to an unrelated third party who is expected to absorb the majority of Three
Pillars’ expected losses. The subordinated note holder absorbs the first dollar of loss in the event of nonpayment of any of
Three Pillars’ assets. The subordinated note matures in March 2015; however, the note holder may declare the note due and
payable upon an event of default, which includes any loss drawn on the note funding account that remains unreimbursed for
90 days. In such an event, only the remaining balance of the first loss note, after the incurred loss, will be due. If the first loss
note holder declared its loss note due under such circumstances and a new first loss note or other first loss protection was not
obtained, the Company would likely consolidate Three Pillars on a prospective basis. The outstanding and committed
amounts of the subordinated note were $20.0 million and $20.0 million at December 31, 2007 and $6.5 million and $8.0
million, at December 31, 2006, respectively.
The Company’s involvement with Three Pillars includes the following activities: services related to the Company’s
administration of Three Pillars’ activities, client referrals and investment recommendations to Three Pillars; the issuing of
letters of credit, which provides partial credit protection to the commercial paper holders; and providing a majority of the
liquidity arrangements that would provide funding to Three Pillars in the event it can no longer issue commercial paper or in
certain other circumstances. Activities related to the Three Pillars relationship generated total fee revenue for the Company,
net of direct salary and administrative costs incurred by the Company, of approximately $28.7 million, $31.0 million and
$25.2 million for the years ended December 31, 2007, 2006, and 2005, respectively. There are no other contractual
arrangements the Company plans to enter into with Three Pillars to provide it additional support.
Off-balance sheet commitments in the form of liquidity facilities and other credit enhancements provided by the Company to
Three Pillars, the sum of which represents the Company’s maximum exposure to potential loss, totaled $7.9 billion and
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