For the briefest of moments, it felt like SunTrust Banks Inc.s calendar had flipped all the way back to 1999.
There was L. Phillip Humann, the companys chairman and chief executive officer, late last month explaining to analysts and investors the workings of an off-balance sheet vehicle SunTrust had set up in early 1999 to help fund its lending.
At the same time Mr. Humann was reminding the audience that just about three years ago SunTrust was settling a dispute over how it booked loan-loss reserves.
I would like to remind you that SunTrust is the one bank in the country who has been accused by the SEC of overly conservative accounting practices, he said.
Times have changed, of course. The collapse of Enron Corp. and accounting issues at PNC Financial Services Group Inc. have increased scrutiny of special units created by banking companies to house problem loans. That means SunTrusts setup is getting a second look.
Also under scrutiny are some long-standing relationships. A case in point: SunTrusts dismissal of the auditor Arthur Andersen & Co., which had handled its books for six decades.
SunTrust downplayed any link between the change in accountants and the controversy surrounding Andersen, which was also Enrons accounting firm. Mike McCoy, a spokesman for the banking company, said Tuesday that the review began before Enrons troubles surfaced and the change had nothing to do with Andersens Enron work. Our selection of a new auditor is not related to the Enron situation.
Still, the decision hardly occurred in an accounting vacuum. Many on the outside saw the change as just another indication of how far banking companies feel they need to go to reassure investors that activities, particularly those occurring partially outside the investors field of vision, are kosher.
Unless the bank comes out with further information, for right now I read this as image polishing, said Darren Parslow, a senior engagement manager for Financial Institutions Consulting in New York.
For SunTrust, which spent a major part of 2001 dealing with the distraction of its hostile bid for the old Wachovia Corp., another controversy was the last thing it needed, and so far it hasnt generated any. Still, investors skittishness about off-balance sheet items has pushed management to divulge more detail about the special unit, a conduit called Three Pillars Funding.
Founded with $400 million of high-grade loans that SunTrust moved off its balance sheet as seed-funding, Three Pillars was named for the three pillars that were saved after SunTrust bought Trust Company of Georgia and knocked down its main building to build an Atlanta headquarters.
What SunTrust did with Three Pillars was very generic it was primarily for low-spread commercial loans, said Jeff Davis, an analyst at First Tennessee Corp.s Midwest Research, who said he had been aware of Three Pillars for some time.
Three Pillars was a product of the times. Banking companies turned to conduits after finding it was more expensive to originate loans with wholesale money like brokered certificates of deposit and book it on the balance sheet, which would require a capital charge, Mr. Davis said.
The SunTrust unit quietly originated high investment-grade loans funded by commercial paper, and returned its revenues to the parent company.
SunTrust, whose loan to deposit ratio had risen to 108.5%, benefited because the commercial paper could fund some of that origination at only a slightly higher price than deposits. And by moving the loans off its balance sheet, the parent gained something else: It could allocate less regulatory capital to those loans than it would need to commit if the loans were on the balance sheet.
The company has not moved any more loans from its balance sheet to the conduit since its creation, and those seed loans have been paid down to about $200 million, said Gary Peacock, the director of investor relations. The additional growth the unit now contains $2.2 billion came from high-quality commercial loans originated by Three Pillars. Funding comes from commercial paper programs rated by Moodys and Standard & Poors.
For everyone but the investors who bought about $2.7 billion of Three Pillars commercial paper, the unit was at most a side note to SunTrusts bigger earnings issues, like its margin or the impact of acquisitions.
However, in the wake of Enron failure and the increased focus on off-balance sheet items by both Wall Street and regulators, SunTrust has increased its disclosure about this entity.
At an investment banking conference in late January, Mr. Humann told investors that Three Pillars today contains $2.2 billion of performing nonclassified assets good stuff. Theres no bad stuff in it.
In its next annual report, the company will include the size of this entity in the footnotes on its balance sheet.
Mr. Humanns comments did not set off any concerns that SunTrust may have PNC-like off-balance sheet skeletons lurking in the closet. The distinguishing characteristics of SunTrusts conduit like many other banking companies special-purpose vehicles is that it contained only high-grade loans, according to analysts.
PNC, on the other hand, said last month that it would have to restate last years earnings because federal regulators concluded it had not adequately represented its interest in an entity that contained distressed assets it had moved off its balance sheet.
David Boraks contributed to this article.
