SunTrust 2008 Annual Report Download - page 150

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
expense related to net settlements on interest rate swaps accounted for as fair value hedges. This hedging strategy
resulted in trading losses from hedge ineffectiveness of $5.0 million for the year ended December 31, 2006. No gains
and losses of swaps designated as fair value hedges were excluded from the assessment of effectiveness. Upon the
adoption of SFAS No. 159 effective January 1, 2007, the Company elected to carry at fair value all recognized liabilities
that had previously been designated in qualifying fair value hedges. In conjunction with this election, all fair value
hedges were dedesignated and opening retained earnings was reduced by $197.2 million, thus no discount or premium
on the debt resulting from hedge accounting remained to be amortized. See Note 20, “Fair Value Election and
Measurement,” to the Consolidated Financial Statements for more information.
The Company maintains a risk management program to manage interest rate risk and pricing risk associated with its
mortgage lending activities. The risk management program includes the use of forward contracts and other derivatives
that are recorded in the financial statements at fair value and are used to offset changes in value of the mortgage
inventory due to changes in market interest rates. A portion of these derivative instruments were documented as 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.
Cash Flow Hedges
The Company has designated interest rate swaps and options as cash flow hedges of probable forecasted transactions
related to recognized assets and liabilities. Specifically, these derivatives have been designated as hedging the exposure
to the benchmark interest rate risk associated with floating rate loans, certificates of deposit, and floating rate debt. The
maximum range of hedge maturities for asset hedges is approximately five to seven years, with the weighted average
being approximately four years; such maximum range for liability hedges is less than one year, with the weighted
average being approximately 0.5 years. The Company recognized net interest income of $180.7 million for the year
ended December 31, 2008 and net interest expense of $25.6 million and $40.9 million for the years ended December 31,
2007 and 2006, respectively, related to the effective portion of interest rate swaps and options that were designated as
cash flow hedges. During the years ended December 31, 2008, 2007, and 2006, $0.0 million, $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. As of December 31, 2008, $225.0 million, net of tax, of
the deferred net gains on derivatives that are recorded in accumulated other comprehensive income are expected to be
reclassified to net interest income in the next twelve months in connection with the recognition of interest income or
interest expense on the hedged item.
During the third quarter of 2008, the Company executed equity forward agreements (the “Agreements”) on 30 million
shares of Coke. A consolidated subsidiary of SunTrust Banks, Inc. owns approximately 22.9 million Coke shares and a
consolidated subsidiary of SunTrust Bank owns approximately 7.1 million Coke shares. These two subsidiaries entered
into separate Agreements on their respective holdings of Coke common shares with a large, unaffiliated financial
institution (the “Counterparty”). Execution of the Agreements (including the pledges of the Coke shares pursuant to the
terms of the Agreements) did not constitute a sale of the Coke shares under U.S. GAAP for several reasons, including
that ownership of the shares was not legally transferred to the Counterparty. The Agreements, in their entirety, are
derivatives based on the criteria in SFAS No. 133. The Agreements resulted in zero cost equity collars pursuant to the
provisions of SFAS No. 133. In accordance with the provisions of SFAS No. 133, the Company has designated the
Agreements as cash flow hedges of the Company’s probable forecasted sales of its Coke shares, which are expected to
occur in approximately six to six and a half years, for overall price volatility below the strike prices on the floor
(purchased put) and above the strike prices on the ceiling (written call). Although the Company is not required to deliver
its Coke shares under the Agreements, the Company has asserted that it is probable, as defined by SFAS No. 133, that it
will sell all of its Coke shares at or around the settlement date of the Agreements. The Federal Reserve’s approval for
Tier 1 Capital was significantly based on this expected disposition of the Coke shares under the Agreements or in
another market transaction. Both the sale and the timing of such sale remain probable to occur as designated. At least
quarterly, the Company assesses hedge effectiveness and measures hedge ineffectiveness with the effective portion of
the changes in fair value of the Agreements generally recorded in accumulated other comprehensive income and any
ineffective portions generally recorded in trading gains and losses. None of the components of the Agreements’ fair
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