SunTrust 2010 Annual Report Download - page 150

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
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 $338
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 Federal Reserve.
ARRA amends certain provisions of EESA and includes a provision that, subject to consultation with the appropriate Federal
banking agency, directs the U.S. Treasury to permit financial institutions from whom the U.S. 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 U.S. Treasury to enact regulations to implement the directives set
forth in ARRA.
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 Series C and Series D 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 Series C and Series D Preferred Stock being recorded at a discount of approximately $132 million. Accretion of the
discount associated with the Series C and Series D Preferred Stock is recognized as an increase to preferred stock dividends
in determining net income/(loss) 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 $25 million, $23 million and $4 million
during 2010, 2009 and 2008, respectively.
The Company is subject to certain restrictions on its ability to increase the dividend on common shares as a result of
participating in the U.S. Treasury’s CPP. Prior to November 14, 2011, unless the Company has redeemed the Series C and
Series D Preferred Stock or the U.S. Treasury has transferred the Series C and Series D Preferred Stock to a third party, the
consent of the U.S. Treasury will be required for the Company to declare or pay any dividend or make any distribution on its
common stock (other than regular quarterly cash dividends of not more than $0.77 per share of common stock) or redeem,
purchase or acquire any shares of its common stock or other equity or capital securities, other than in connection with benefit
plans consistent with past practice and certain other circumstances specified in the Purchase Agreement. Prior to
December 31, 2011, unless the Company has redeemed the Series D Preferred Stock or the U.S. Treasury has transferred the
Series D Preferred Stock to a third party, the consent of the U.S. Treasury will be required for the Company to declare or pay
any dividend or make any distribution on its common stock (other than regular quarterly cash dividends of not more than
$0.77 per share of common stock) or redeem, purchase or acquire any shares of its common stock or other equity or capital
securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified
in the Purchase Agreement. In addition, if the Company increases its dividend above $0.54 per share per quarter prior to the
tenth anniversary of its participation in the CPP, then the anti-dilution warrants issued in connection with the Company’s
participation in the CPP will require the exercise price and number of shares to be issued upon exercise to be proportionately
adjusted. The amount of such adjustment is determined by a formula and depends in part on the extent to which the Company
raises its dividend. The formulas are contained in the warrant agreements which were filed as exhibits to the 2008 10-K.
During the years ended December 31, 2010, 2009 and 2008, SunTrust paid cash dividends on perpetual preferred stock
totaling $239 million, $246 million and $37 million, respectively.
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