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SunTrust Announces Actions That Improve Risk Profile And Strengthen Balance Sheet

Stocks in this article: STI

ATLANTA, Sept. 6, 2012 /PRNewswire/ -- SunTrust Banks, Inc. (NYSE: STI) today announced a series of actions in the third quarter 2012 that better position the Company for the future. 

Summary of Actions

  • SunTrust accelerated the termination of the agreements regarding the shares owned in The Coca-Cola Company.  This will generate a third quarter pre-tax gain of approximately $1.9 billion.
  • In light of ongoing discussions with Fannie Mae and Freddie Mac, the Company expects to record an estimated $375 million mortgage repurchase provision during the quarter.  This action increases the mortgage repurchase reserve to a level that is expected to be sufficient to cover the remaining demands on loans sold to the Government Sponsored Enterprises ("GSEs") prior to 2009.  This is the population of loans from which the Company has experienced the preponderance of mortgage repurchase losses to date.
  • SunTrust intends to transfer approximately $3 billion of loans to loans held for sale.  The loans include nonperforming mortgage loans, nonperforming commercial real estate ("CRE") loans, delinquent Ginnie Mae loans, and delinquent and current student loans.  In connection with the transfer, SunTrust expects to record pre-tax charges of approximately $250 million, reflective of market valuation adjustments.    
  • SunTrust also intends to sell approximately $200 million of affordable housing investments.  As a result, the Company expects to incur a pre-tax loss of approximately $100 million

"These actions better position SunTrust for the future by further improving our risk profile and strengthening our balance sheet while keeping regulatory capital ratios stable," said SunTrust Chairman and Chief Executive Officer, William H. Rogers, Jr.  "Furthermore, the steps we are taking add to the momentum SunTrust has been building, with consistently improving financial trends, and progress in many of our markets."

Termination of Agreements Involving Coca-Cola StockIn 2008, SunTrust entered into two Variable Forward Purchase Agreements ("VFPAs") with an unaffiliated third party.  Per the terms of the agreements, SunTrust was to deliver to the counterparty its shares in The Coca-Cola Company ("KO"), or an equivalent amount of cash, at the 2014 and 2015 settlement dates.  The counterparty was to deliver to SunTrust cash of no less than a floor price of approximately $19 per KO share and no more than a ceiling price of approximately $33 per KO share (prices are split-adjusted).  Because the Company intended to sell its shares at the settlement date, the Federal Reserve granted SunTrust Tier 1 common capital credit of approximately $730 million, which was reflective of the after-tax value of the KO shares at the floor price.  By retaining the shares from 2008 to now, SunTrust was able to continue receiving the KO dividends and participate in the upside price appreciation to the ceiling of the KO shares.

SunTrust recently reevaluated these holdings in light of the new regulatory proposal regarding Basel III, which, as proposed, would increase the risk-weighted assets of equity holdings and introduce potential volatility to SunTrust's regulatory capital ratios via fluctuations in Other Comprehensive Income.  Additionally, negative implications associated with equity securities in assumed adverse economic scenarios within future CCAR assessments were considered as part of the Company's evaluation.  Following this review, SunTrust and the counterparty accelerated the termination of the VFPAs, and SunTrust sold in the market or to the counterparty 59 of its 60 million shares of The Coca-Cola Company.  SunTrust also repurchased the notes from the counterparty issued in 2008 in connection with the VFPAs. 

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