SunTrust 2008 Annual Report Download - page 136

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
Cumulative dividends on the Series C Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for
the first five years, and at a rate of 9% per annum thereafter, but will be paid only if, as, and when declared by the
Company’s Board of Directors (“the Board”). The Series C Preferred Stock has no maturity date and ranks senior to the
Company’s common stock (and pari passu with the Company’s other authorized series of preferred stock) with respect to the
payment of dividends and distributions and amounts payable upon liquidation, dissolution, and winding up of the Company.
The Series C Preferred Stock generally is non-voting.
The Company may redeem the Series C Preferred Stock at par on or after December 15, 2011. Prior to this date, the
Company may redeem the Series C Preferred Stock at par if the Company has raised aggregate gross proceeds in one or more
Qualified Equity Offerings, as defined in the Company’s articles of incorporation and in the purchase agreement, in excess of
$875 million, and the aggregate redemption price does not exceed the aggregate net proceeds from such Qualified Equity
Offerings. Any redemption is subject to the consent of the Board of Governors of the Federal Reserve.
On December 31, 2008, as part of the Capital Purchase Program established by the Treasury under the EESA, the Company
entered into a Purchase Agreement with Treasury dated December 31, 2008 pursuant to which the Company issued and sold
to Treasury 13,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D, having a liquidation
preference of $100,000 per share (the “Series D Preferred Stock”), and a ten-year warrant to purchase up to 6,008,902 shares
of the Company’s common stock, par value $1.00 per share, at an initial exercise price of $33.70 per share, for an aggregate
purchase price of $1.35 billion in cash.
Cumulative dividends on the Series D Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for
the first five years, and at a rate of 9% per annum thereafter, but will be paid only if, as, and when declared by the
Company’s Board. The Series D Preferred Stock has no maturity date and ranks senior to the Company’s common stock (and
pari passu with the Company’s other authorized series of preferred stock) with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution, and winding up of the Company. The Series D Preferred
Stock generally is non-voting.
The Company may redeem the Series D Preferred Stock at par on or after March 15, 2012, but only after it has redeemed the
Series C Preferred Stock. Prior to such time, the Company may redeem the Series D Preferred Stock at par if the Company
has redeemed all of the Series C Preferred Stock, the Company has raised aggregate gross proceeds in one or more Qualified
Equity Offerings, as defined in the Company’s articles of incorporation and in the purchase agreement, in excess of $337.5
million, and the aggregate redemption price does not exceed the aggregate net proceeds from such Qualified Equity
Offerings. Any redemption is subject to the consent of the Board of Governors of the Federal Reserve.
The American Reinvestment and Recovery Act of 2009 (“ARRA”) amends certain provisions of EESA and includes a
provision that, subject to consultation with the appropriate Federal banking agency, directs the Treasury to permit financial
institutions from whom the Treasury purchased preferred stock to redeem such preferred stock without regard to whether
such financial institution has replaced such funds and not subject to any waiting period. The statute also directs the Treasury
to enact regulations to implement the directives set forth in ARRA; however, these regulations have not yet been published.
The Company anticipates this could mean that, subject to the consent of the Federal Reserve, it may be able to redeem the
Series C Preferred Stock or Series D Preferred Stock issued to the Treasury without regard to any waiting period or certain
requirements to raise capital.
Upon issuance, the fair values of the Series C and Series D Preferred stock and the associated warrants were computed as if
the instruments were issued on a stand alone basis. The fair values of the Series C and Series D Preferred stock were
estimated based on observable trading levels of similar securities, resulting in a combined stand alone fair value estimate of
approximately $3.9 billion. The Company used an options pricing model (Bjerksund-Stensland) to estimate the fair value of
the warrants as of the two issuance dates, resulting in a combined stand alone fair value at each respective issuance date of
approximately $110 million. The most significant and unobservable assumption in this valuation was volatility. The
Company evaluated current listed market activity for its options, which is approximately two years, and historical data in
arriving at an estimate of ten year volatility that the Company believed would be similar to an approach used by market
participants. The individual fair values were then used to record the Preferred stock and associated warrants on a relative fair
value basis, with the warrants being recorded in Additional Paid in Capital as permanent equity and the Preferred stock being
recorded at a discount of approximately $132 million. Accretion of the discount associated with the preferred stock is
recognized as an increase to preferred stock dividends in determining net income available to common shareholders. The
discount is being amortized over a five-year period from each respective issuance date using the effective yield method and
totaled $3.7 million during 2008.
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