SunTrust 2007 Annual Report Download - page 132

SUNTRUST BANKS, Inc.
Notes to Consolidated Financial Statements (Continued)
fair value hedges of specific pools of loans that met the similar assets test. The pools of loans were matched with a certain
portion of the derivative instruments so that the expected changes in market value would inversely offset within a range of
80% to 125%. The qualifying pools of hedged loans were recorded in the financial statements at their fair value. This
hedging strategy resulted in ineffectiveness that reduced earnings by $0.3 million and $21.1 million for the years ended
December 31, 2007 and 2006, respectively. This hedge accounting designation was terminated in 2007 as a result of the
Company’s adoption of SFAS No. 159 and its decision to elect fair value accounting for a substantial portion of the loans
held for sale.
The Company has designated interest rate swaps and options as cash flow hedges of probable forecasted transactions related
to recognized assets and liabilities. The Company recognized interest expense of $25.5 million and $40.9 million for the
years ended December 31, 2007 and 2006, respectively, related to interest rate swaps and options accounted for as cash flow
hedges. During the years ended December 31, 2007 and 2006, $0.4 million and $2.2 million, respectively, were recognized
as trading losses from hedge ineffectiveness of swaps and options and amounts excluded from the assessment of
effectiveness of option hedges.
Gains and losses on derivatives that are reclassified from accumulated other comprehensive income to current period
earnings are included in net interest income. As of December 31, 2007, $45.3 million, net of taxes, of the deferred net gains
on derivatives 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.
Derivative 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 derivative 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 or liabilities
and any gain or loss in market value is recorded in trading income. As of December 31, 2007 and 2006, referenced assets
covered by these arrangements totaled $1,101.0 million and $979.0 million, respectively.
Credit-Related Arrangements
In meeting the financing needs of its clients, the Company issues commitments to extend credit, standby and other letters of
credit, and guarantees. For additional information regarding guarantees, which includes standby and other letters of credit see
Note 18, “Reinsurance Arrangements and Guarantees,” to the Consolidated Financial Statements. 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 client who has complied with predetermined contractual
conditions. Commitments generally have fixed expiration dates and are subjected to the Company’s credit policy standards.
As of December 31, 2007 and 2006, the Company had outstanding unfunded commitments to extend credit to its clients
totaling $83.2 billion and $98.5 billion, respectively.
Variable Interest Entities
Since 1999, SunTrust has assisted in providing liquidity to select corporate clients by directing them to a multi-seller
commercial paper conduit that the Company administers, Three Pillars Funding, LLC (“Three Pillars”). Three Pillars
provides financing for direct purchases of financial assets originated and serviced by SunTrust’s corporate clients. Three
Pillars finances this activity by issuing A-1/P-1 rated commercial paper (“CP”). The result is a favorable funding
arrangement for these clients.
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