SunTrust 2008 Annual Report Download - page 153

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements
related to the Litigation. Additionally, in connection with the restructuring, a provision of the original Visa By-Laws,
Section 2.05j, was restated in Visa’s certificate of incorporation. Section 2.05j contains a general indemnification
provision between a Visa member and Visa, and explicitly provides that after the closing of the restructuring, each
member’s indemnification obligation is limited to losses arising from its own conduct and the specifically defined
Litigation. The maximum potential amount of future payments that the Company could be required to make under this
indemnification provision cannot be determined as there is no limitation provided under the By-Laws and the amount of
exposure is dependent on the outcome of the Litigation. As a result of the indemnification provision in Section 2.05j of
the Visa By-Laws and/or the indemnification provided through the judgment or loss sharing agreements, the Company
estimated the fair value of the net guarantee to be $76.9 million as of December 31, 2007 and $43.5 million as of
December 31, 2008. Upon Visa’s IPO in March 2008, Visa funded $3.0 billion into an escrow account, established for
the purposes of funding judgments in, or settlements of, the Litigation. In October 2008, Visa reached a settlement with
Discover Financial Services related to a case within the covered Litigation and as a result, the Company estimated that
the settlement incrementally added $20.0 million to the fair value of its guarantee liability. Following the Discover
settlement, Visa funded an additional $1.1 billion to the escrow account during December. While the Company could be
required to separately fund its proportionate share of the Litigation losses, it is expected that the escrow account will be
used to pay all or a substantial amount of the losses. Therefore, for the year ending December 31, 2008, SunTrust
recorded $53.4 million, its expected economic benefit associated with the $4.1 billion in escrow funding, as an offset to
the guarantee liability and as a reduction to Visa litigation expense. A high degree of subjectivity was used in estimating
the fair value of the guarantee obligation and the ultimate cost to the Company could be significantly higher or lower
than the liability recorded as of December 31, 2008.
Letters of Credit
Letters of credit are conditional commitments issued by the Company generally to guarantee the performance of a client
to a third party in borrowing 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 letters of credit that are
classified as financial standby, performance standby, or commercial letters of credit. Commercial letters of credit are
specifically excluded from the disclosure and recognition requirements of FIN 45.
As of December 31, 2008 and December 31, 2007, the maximum potential amount of the Company’s obligation was
$13.8 billion and $12.6 billion, respectively, for financial and performance standby letters of credit. The Company has
recorded $141.9 million and $112.4 million in other liabilities for unearned fees related to these letters of credit as of
December 31, 2008 and December 31, 2007, respectively. The Company’s outstanding letters of credit generally have a
term of less than one year but may extend longer than one year. If a letter of credit is drawn upon, the Company may
seek recourse through the client’s underlying obligation. If the client’s line of credit is also in default, the Company may
take possession of the collateral securing the line of credit, where applicable. The Company monitors its credit exposure
under standby letters of credit in the same manner as it monitors other extensions of credit in accordance with credit
policies. Some standby letters of credit are designed to be drawn upon and others are drawn upon only under
circumstances of dispute or default in the underlying transaction to which the bank is not a party. In all cases, the bank
holds the right to reimbursement from the applicant and may or may not also hold collateral to secure that right. An
internal assessment of the probability of default and loss severity in the event of default is assessed consistent with the
methodologies used for all commercial borrowers and the management of risk regarding letters of credit leverages the
risk rating process to focus higher visibility on the higher risk and higher dollar letters of credit.
Loan Sales
SunTrust Mortgage, Inc. (“STM”), a consolidated subsidiary of SunTrust, originates and purchases consumer residential
mortgage loans, a portion of which are sold to outside investors in the normal course of business. When mortgage loans
or MSRs are sold, representations and warranties regarding certain attributes of the loans sold are made to the third
party purchaser. These representations and warranties may extend through the life of the mortgage loan, generally 25 to
30 years. Subsequent to the sale, if inadvertent underwriting deficiencies or documentation defects are discovered in
individual mortgage loans, STM will be obligated to repurchase the respective mortgage loan or MSRs and absorb the
loss if such deficiencies or defects cannot be cured by STM within the specified period following discovery. STM also
maintains a liability for estimated losses on mortgage loans and MSRs that may be repurchased due to breach of general
representations and warranties or purchasers’ rights under early payment default provisions. STM’s risk of repurchasing
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