SunTrust 2011 Annual Report Download - page 185
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Please find page 185 of the 2011 SunTrust annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Notes to Consolidated Financial Statements (Continued)
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account, established for the purpose of funding judgments in, or settlements of, the Litigation. Agreements associated with
Visa’s IPO have provisions that Visa will first use the funds in the escrow account to pay for future settlements of, or judgments
in the Litigation. If the escrow account is insufficient to cover the Litigation losses, then Visa will issue additional Class A
shares (“loss shares”). The proceeds from the sale of the loss shares would then be deposited in the escrow account. The issuance
of the loss shares will cause a dilution of Visa’s Class B shares as a result of an adjustment to lower the conversion factor of
the Class B shares to Class A shares. Visa U.S.A.’s members are responsible for any portion of the settlement or loss on the
Litigation after the escrow account is depleted and the value of the Class B shares is fully-diluted. In May 2009, the Company
sold its 3.2 million Visa Inc. Class B shares to another financial institution (“the Counterparty”) and entered into a derivative
with the Counterparty. The Company received $112 million and recognized a gain of $112 million in connection with these
transactions. Under the derivative, the Counterparty will be compensated by the Company for any decline in the conversion
factor as a result of the outcome of the Litigation. Conversely, the Company will be compensated by the Counterparty for any
increase in the conversion factor. The amount of compensation is a function of the 3.2 million shares sold to the Counterparty,
the change in conversion rate, and Visa’s share price. The Counterparty, as a result of its ownership of the Class B shares, will
be impacted by dilutive adjustments to the conversion factor of the Class B shares caused by the Litigation losses. The conversion
factor at the inception of the derivative in May 2009 was 0.6296 and as of December 31, 2011 the conversion factor had
decreased to 0.4254 due to Visa’s funding of the litigation escrow account. The decreases in the conversion factor triggered
payments by the Company to the Counterparty of $8 million, $17 million, and $10 million during 2011, 2010, and 2009,
respectively. A high degree of subjectivity was used in estimating the fair value of the derivative liability, and the ultimate
impact to the Company could be significantly higher or lower than the $22 million and $23 million recorded as of December
31, 2011 and 2010, respectively. See Note 20, "Contingencies," for additional discussion of the related litigation.
Public Deposits
The Company holds public deposits from various states in which it does business. Individual state laws require banks to
collateralize public deposits, typically as a percentage of their public deposit balance in excess of FDIC insurance and may
also require a cross-guarantee among all banks holding public deposits of the individual state. The amount of collateral required
varies by state and may also vary by institution within each state, depending on the individual state’s risk assessment of
depository institutions. Certain of the states in which the Company holds public deposits use a pooled collateral method,
whereby in the event of default of a bank holding public deposits, the collateral of the defaulting bank is liquidated to the extent
necessary to recover the loss of public deposits of the defaulting bank. To the extent the collateral is insufficient, the remaining
public deposit balances of the defaulting bank are recovered through an assessment, from the other banks holding public
deposits in that state. The maximum potential amount of future payments the Company could be required to make is dependent
on a variety of factors, including the amount of public funds held by banks in the states in which the Company also holds public
deposits and the amount of collateral coverage associated with any defaulting bank. Individual states appear to be monitoring
this risk relative to the current economic environment and evaluating collateral requirements; therefore, the likelihood that the
Company would have to perform under this guarantee is dependent on whether any banks holding public funds default as well
as the adequacy of collateral coverage.
Other
In the normal course of business, the Company enters into indemnification agreements and provides standard representations
and warranties in connection with numerous transactions. These transactions include those arising from securitization activities,
underwriting agreements, merger and acquisition agreements, loan sales, contractual commitments, payment processing,
sponsorship agreements, and various other business transactions or arrangements. The extent of the Company’s obligations
under these indemnification agreements depends upon the occurrence of future events; therefore, the Company’s potential
future liability under these arrangements is not determinable.
STIS and STRH, broker-dealer affiliates of SunTrust, use a common third-party clearing broker to clear and execute their
customers’ securities transactions and to hold customer accounts. Under their respective agreements, STIS and STRH agree
to indemnify the clearing broker for losses that result from a customer’s failure to fulfill its contractual obligations. As the
clearing broker’s rights to charge STIS and STRH have no maximum amount, the Company believes that the maximum potential
obligation cannot be estimated. However, to mitigate exposure, the affiliate may seek recourse from the customer through cash
or securities held in the defaulting customers’ account. For the years ended December 31, 2011, 2010, and 2009, STIS and
STRH experienced minimal net losses as a result of the indemnity. The clearing agreements expire in May 2015 for both STIS
and STRH.
SunTrust Community Capital, a SunTrust subsidiary, previously obtained state and federal tax credits through the construction
and development of affordable housing properties and continues to obtain state and federal tax credits through investments in
affordable housing developments. SunTrust Community Capital or its subsidiaries are limited and/or general partners in various
partnerships established for the properties. Some of the investments that generate state tax credits may be sold to outside