SunTrust 2009 Annual Report Download - page 152

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
Counterparty of $10.1 million. A high degree of subjectivity was used in estimating the fair value of the derivative
liability, and the ultimate cost to the Company could be significantly higher or lower than the $40.4 million recorded as
of December 31, 2009.
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 CP, 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.
As of December 31, 2009 and December 31, 2008, the maximum potential amount of the Company’s obligation was
$8.9 billion and $13.8 billion, respectively, for financial and performance standby letters of credit. The Company has
recorded $130.6 million and $141.9 million in other liabilities for unearned fees related to these letters of credit as of
December 31, 2009 and December 31, 2008, 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 Company is not a party. In all cases, the
Company 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. The
associated reserve is a component of the unfunded commitment reserve included in the allowance for credit losses as
disclosed in Note 7, “Allowance for Credit Losses,” to the Consolidated Financial Statements.
Loan Sales
STM, a consolidated subsidiary of SunTrust, originates and purchases residential mortgage loans, a portion of which are
sold to outside investors in the normal course of business. When mortgage loans 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, up to 25 to 30 years. Subsequent to the sale, if an inadvertent
underwriting deficiency or documentation defect is discovered, STM may be obligated to reimburse the investor for
losses incurred or to repurchase the mortgage loan if such deficiency or defect cannot be cured by STM within the
specified period following discovery. STM’s risk of loss under its representations and warranties is largely driven by
borrower payment performance since investors will perform extensive reviews of delinquent loans as a means of
mitigating losses.
STM maintains a liability for this loss contingency, which is initially based on the estimated fair value of the
Company’s contingency at the time loans are sold and the guarantee liability is created. Subsequently, STM estimates
losses that have been incurred and increases the liability if estimated incurred losses exceed the guarantee liability. As
of December 31, 2009 and December 31, 2008, the liability for contingent losses related to sold loans totaled $199.9
million and $91.8 million, respectively. STM also maintains a liability for contingent losses related to MSR sales, which
totaled $2.5 million and $8.7 million as of December 31, 2009 and December 31, 2008, respectively.
Contingent Consideration
The Company has contingent payment obligations related to certain business combination transactions. Payments are
calculated using certain post-acquisition performance criteria. Arrangements entered into prior to January 1, 2009, the
effective date of the newly issued business combination accounting guidance, are not recorded as liabilities; whereas
arrangements entered into subsequent to the effective date of the guidance are recorded as liabilities. The potential
obligation associated with these arrangements was approximately $12.6 million and $31.8 million as of December 31,
2009 and December 31, 2008, respectively, of which $3.8 million and $0 million was recorded as liabilities representing
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