SunTrust 2011 Annual Report Download - page 126
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Please find page 126 of the 2011 SunTrust annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Notes to Consolidated Financial Statements (Continued)
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by the weighted average number of common shares outstanding during each period, plus common share equivalents calculated
for stock options and restricted stock outstanding using the treasury stock method. In periods of a net loss, diluted EPS is calculated
in the same manner as basic EPS.
The Company has issued certain restricted stock awards, which are unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities.
Accordingly, the Company calculated net income available to common shareholders pursuant to the two-class method, whereby
net income is allocated between common shareholders and participating securities. In periods of a net loss, no allocation is made
to participating securities as they are not contractually required to fund net losses.
Net income available to common shareholders represents net income/(loss) after preferred stock dividends, accretion of the discount
on preferred stock issuances, gains or losses from any repurchases of preferred stock, and dividends and allocation of undistributed
earnings to the participating securities. For additional information on the Company’s EPS, see Note 13, “Net Income/(Loss) Per
Share.”
Guarantees
The Company recognizes a liability at the inception of a guarantee, at an amount equal to the estimated fair value of the obligation.
A guarantee is defined as a contract that contingently requires a company to make payment to a guaranteed party based upon
changes in an underlying asset, liability or equity security of the guaranteed party, or upon failure of a third-party to perform under
a specified agreement. The Company considers the following arrangements to be guarantees: certain asset purchase/sale agreements,
standby letters of credit and financial guarantees, certain indemnification agreements included within third-party contractual
arrangements and certain derivative contracts. For additional information on the Company’s guarantor obligations, see Note 18,
“Reinsurance Arrangements and Guarantees.”
Derivative Financial Instruments and Hedging Activities
The Company records all contracts that satisfy the definition of a derivative at fair value in the Consolidated Balance Sheets.
Accounting for changes in the fair value of a derivative is dependent upon its classification as either a freestanding derivative or
a derivative that has been designated as a hedging instrument. The Company offsets cash collateral paid to and received from
derivatives counterparties when the derivative contracts are subject to ISDA master netting arrangements and meet derivatives
accounting guidance.
Changes in the fair value of freestanding derivatives are recorded in noninterest income. Freestanding derivatives include derivatives
that the Company enters into in a dealer capacity to facilitate client transactions and as a risk management tool to economically
hedge certain identified market risks, along with certain IRLCs on residential mortgage loans that are a normal part of the Company’s
operations. The Company also evaluates contracts, such as brokered deposits and short-term debt, to determine whether any
embedded derivatives are required to be bifurcated and separately accounted for as freestanding derivatives. For certain contracts
containing embedded derivatives, the Company has elected not to bifurcate the embedded derivative and instead carry the entire
contract at fair value.
Certain derivatives are also used as risk management tools and designated as accounting hedges of the Company’s exposure to
changes in interest rates or other identified market risks. The Company prepares written hedge documentation for all derivatives
which are designated as hedges of (1) changes in the fair value of a recognized asset or liability (fair value hedge) attributable to
a specified risk or (2) a forecasted transaction, such as the variability of cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge). The written hedge documentation includes identification of, among other items, the risk
management objective, hedging instrument, hedged item and methodologies for assessing and measuring hedge effectiveness and
ineffectiveness, along with support for management’s assertion that the hedge will be highly effective. Methodologies related to
hedge effectiveness and ineffectiveness are consistent between similar types of hedge transactions and have included (i) statistical
regression analysis of changes in the cash flows of the actual derivative and a perfectly effective hypothetical derivative, and
(ii) statistical regression analysis of changes in the fair values of the actual derivative and the hedged item.
For designated hedging relationships, the Company performs retrospective and prospective effectiveness testing using quantitative
methods and does not assume perfect effectiveness through the matching of critical terms. Assessments of hedge effectiveness
and measurements of hedge ineffectiveness are performed at least quarterly for ongoing effectiveness. Changes in the fair value
of a derivative that is highly effective and that has been designated and qualifies as a fair value hedge are recorded in current
period earnings, along with the changes in the fair value of the hedged item that are attributable to the hedged risk. The effective
portion of the changes in the fair value of a derivative that is highly effective and that has been designated and qualifies as a cash
flow hedge are initially recorded in AOCI and reclassified to earnings in the same period that the hedged item impacts earnings;
any ineffective portion is recorded in current period earnings.