SunTrust 2008 Annual Report Download - page 58

INVESTMENT IN COMMON SHARES OF THE COCA-COLA COMPANY
Background
We have owned common shares of Coke since 1919, when one of our predecessor institutions participated in the
underwriting of Coke’s initial public offering and received common shares of Coke in lieu of underwriting fees. These shares
have grown in value over the past 89 years and have been classified as available for sale securities, with unrealized gains, net
of tax, recorded as a component of shareholders’ equity. Because of the low accounting cost basis of these shares, we have
accumulated significant unrealized gains in shareholders’ equity. As of December 31, 2007, our total holdings of
approximately 43.6 million Coke shares had an accounting cost basis of $100,000 and a fair value of approximately $2.7
billion. As of December 31, 2008, as a result of the transactions discussed herein, we owned 30 million Coke shares with an
accounting cost basis of $69,295 and a fair market value of approximately $1.4 billion.
We established a target Tier 1 Capital ratio of 7.50% in 2006 and commenced a comprehensive balance sheet review
initiative in early 2007 in an effort to improve liquidity and capital efficiency. As part of this initiative, we began to formally
evaluate the capital efficiency of our holdings of Coke common shares, as we were prohibited from including the market
value of our investment in Coke common shares in Tier 1 Capital in accordance with Federal Reserve capital adequacy rules.
Executed Multi-Step Strategy
As we reported in connection with our financial results for the quarter ended June 30, 2007, we sold 4.5 million Coke
common shares, or approximately 9% of our holdings at that time, in an open market sale. At that time, we also announced
publicly that we were evaluating various strategies to address our remaining Coke common shares.
In the second and third quarters of 2008, we completed the following three-part strategy with respect to our remaining
43.6 million common shares of Coke: (i) a market sale of 10 million shares, (ii) a charitable contribution of approximately
3.6 million shares to the SunTrust Foundation and (iii) the execution of equity forward agreements on 30 million shares. Our
primary objective in executing these transactions was to optimize the benefits we obtained from our long-term holding of this
asset, including the capital treatment by bank regulators.
I. Market Sale
During the second quarter of 2008, we sold 10 million Coke common shares in the market. These sales, which
resulted in an increase of approximately $345 million, or approximately 20 basis points, to Tier 1 Capital,
generated approximately $549 million in net cash proceeds and an after-tax gain of approximately $345 million
that was recorded in our financial results for the quarter ended June 30, 2008. This transaction will result in
foregone dividend income of approximately $0.04 per share in annual earnings per share and gave rise to a current
tax liability with a marginal rate of just over 37%.
II. Contribution to the SunTrust Foundation
In July 2008, we contributed approximately 3.6 million Coke common shares to the SunTrust Foundation, which
was reflected as a contribution expense of $183.4 million in our financial results for the quarter ended
September 30, 2008. As the gain from this contribution is non-taxable, the only impact to our net income was the
release of the deferred tax liability of approximately $65.8 million (net of valuation allowance). This contribution
increased Tier 1 Capital in the third quarter by approximately $65.8 million, or approximately 4 basis points. This
gain and resultant increase to Tier 1 Capital were reflected in our third quarter results, as we had not made any
commitments or entered into any other transactions as of June 30, 2008 that would have required us to record this
contribution in the second quarter. This contribution will result in foregone dividend income of approximately
$0.01 per share in annual earnings per share. We expect this contribution to act as an endowment for the SunTrust
Foundation to make grants to charities operating within our footprint for years to come and reduce our ongoing
charitable contribution expense. This transaction was treated as a discrete item for income tax provision purposes
and significantly lowered the effective tax rate for the third quarter of 2008.
III. Equity Forward Agreements
The final piece of the strategy related to the remaining 30 million Coke common shares and was executed in July
2008. We entered into two variable forward agreements and share forward agreements effective July 15, 2008 with
a major, unaffiliated financial institution (the “Counterparty”) collectively covering our 30 million Coke shares
(the “Agreements”). Under the Agreements, we must deliver to the Counterparty at settlement of the variable
forward agreements either a variable number of Coke common shares or a cash payment in lieu of such shares. The
Counterparty is obligated to settle the Agreements for no less than approximately $38.67 per share, or
approximately $1.16 billion in the aggregate (the “Minimum Proceeds”). The share forward agreements give us the
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