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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
SUNTRUST 2004 ANNUAL REPORT 97
market conditions and the current shape of the yield curve. The
terms and notional amounts of the swaps are determined based on
management’s assessment of future interest rates, as well as on
other factors.
For the years ended December 31, 2004 and 2003, the Company
recognized expense in the net interest margin of $46.2 million and
$66.7 million, respectively, related to interest rate swaps accounted
for as cash flow hedges.
Gains and losses on derivative contracts that are reclassified from
accumulated other comprehensive income to current period earn-
ings are included as an adjustment to the cost of funding in the net
interest margin. As of December 31, 2004, $12.1 million, net of
taxes, of the deferred net gains on derivative instruments that are
recorded in accumulated other comprehensive income are
expected to be reclassified to interest expense in the next twelve
months as derivatives mature or as payments are made.
TRADING ACTIVITIES
The Company enters into various derivative contracts on behalf of
its clients and for its own trading account.These trading positions
primarily include interest rate swaps, equity derivatives, credit
default swaps, futures, options, and foreign currency contracts.The
Company maintains positions in interest rate swaps for its own
trading account as part of its overall interest rate risk management
strategy. Foreign exchange derivative contracts are used to manage
the Company’s foreign currency exchange risk and to provide deriv-
ative products to customers. The Company does not have any
hedges of foreign currency exposure within the guidelines of SFAS
No. 133.The Company buys and sells credit protection to customers
and dealers using credit default swaps.These derivative instruments
allow the Company to pay or receive a stream of payments in return
for receiving or providing protection in the event of default. These
derivatives are accounted for as trading assets and any gain or loss
in market value is recorded in trading income.As of December 31,
2004 and 2003, referenced assets covered by these arrangements
totaled $1,549.0 million and $440.0 million, respectively.
CREDIT-RELATED ARRANGEMENTS
In meeting the financing needs of its customers, the Company
issues commitments to extend credit, standby and other letters of
credit and guarantees. For additional information regarding guaran-
tees, which includes standby and other letters of credit see Note 18.
The Company also provides securities lending services. For these
instruments, the contractual amount of the financial instrument
represents the maximum potential credit risk if the counterparty
does not perform according to the terms of the contract. A large
majority of these contracts expire without being drawn upon. As a
result, total contractual amounts do not represent actual future
credit exposure or liquidity requirements.
Commitments to extend credit are agreements to lend to a cus-
tomer who has complied with predetermined contractual condi-
tions. Commitments generally have fixed expiration dates and are
subjected to the Company’s credit policy standards.As of December
31, 2004, the Company had outstanding commitments to extend
credit to its customers totaling $73.2 billion.
The Company services mortgage loans other than those which are a
part of the Company’s residential loan portfolio, and, in some cases,
accepts a recourse liability on the serviced loans.The Company’s
exposure to credit loss in the event of nonperformance by the other
party to these recourse loans is approximately $6.3 billion as of
December 31, 2004. In addition to the value of the property serving
as collateral, approximately $4.7 billion of the balance of these
At December 31, 2004 At December 31, 2003
Contract or Contract or
Notional Amount Notional Amount
For Credit Risk For Credit Risk
(Dollars in millions) End User Customers1Amount End User Customers1Amount
Derivatives Contracts
Interest rate contracts
Swaps $17,459 $42,507 $ 478 $ 9,524 $39,468 $ 395
Futures and forwards 8,649 1,512 — 4,836 3,861 —
Caps/Floors 60 10,866 — 30 8,176 —
Total interest rate contracts 26,168 54,885 478 14,390 51,505 395
Foreign exchange rate contracts — 6,020 78 — 6,129 82
Interest rate lock commitments 3,793 — — 2,795 — —
Commodity and other contracts 1,549 468 179 440 29 68
Total derivatives contracts $31,510 $61,373 $ 735 $17,625 $57,663 $ 545
Credit-related Arrangements
Commitments to extend credit $73,183 $73,183 $56,584 $56,584
Standby letters of credit and
similar arrangements 11,125 11,125 9,843 9,843
Total credit-related arrangements $84,308 $84,308 $66,427 $66,427
Total Credit Risk Amount $85,043 $66,972
1Includes both long and short derivative contracts.