Updated with early price action and comment from BMO Capital Markets Analyst Lana Chan about her upgrade of SunTrust.
The Atlanta lender is accelerating the sale of its 2.33% stake in Coca Cola (KO - Get Report), moving up two variable forward purchase agreements (VFPAs), through which SunTrust was to sell its Coke shares in two blocks in 2014 and 2015, or deliver equivalent cash, to "an unaffiliated third party." Under the original agreements, the third party was to pay between $19 and $33 dollars per Coke share.
Coke's shares closed Thursday at $38.15. Because the Federal Reserve's proposed rules to implement the Basel III capital requirements "would increase the risk-weighted assets of equity holdings and introduce potential volatility to SunTrust's regulatory capital ratios," while also increasing uncertainty in the annual regulatory stress test process, the company "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 said it was contributing the remaining one million Coke shares -- valued at $37 million -- to its charitable foundation. The company also announced it would transfer roughly $3 billion in loans to held-for-sale, including performing student loans and nonperforming residential mortgage and commercial real estate loans, resulting in pre-tax charges of $250 million. SunTrust will also sell about $200 million in affordable housing investments, resulting in a pre-tax loss of about $100 million. Taken together, the actions will result in a pre-tax gain of $1.9 billion, or $1.2 billion after taxes. Because the Federal Reserve "granted SunTrust Tier 1 common capital credit of approximately $730 million," under the original agreements to sell the Coke shares, the company said that its Tier 1 common equity would increase by $490 million. Investors reacted by sending SunTrust's shares up 4% in early trading, to $27.75. SunTrust's balance sheet moves are taking place as the company continues trying to move beyond the housing crisis, also announcing on Thursday that "in light of ongoing discussions with Fannie Mae (FNMA) and Freddie Mac (FMCC), the Company expects to record an estimated $375 million mortgage repurchase provision" during the third quarter, which is "expected to be sufficient" to cover mortgage putback demands on loans sold to the government-sponsored mortgage giants prior to 2009.