SunTrust 2011 Annual Report Download - page 180
Download and view the complete annual report
Please find page 180 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)
164
any time due to unforeseen circumstances. To date, no material losses have been incurred related to the Company’s written risk
participations. At December 31, 2011 and 2010, the remaining terms on these risk participations generally ranged from one month
to seven years and one month to eight years, respectively, with a weighted average on the maximum estimated exposure of 3.5
years and 3.1 years, respectively. The Company’s maximum estimated exposure to written risk participations, as measured by
projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100%
default by all obligors on the maximum values, was approximately $57 million and $74 million at December 31, 2011 and 2010,
respectively. The fair values of the written risk participations were not material at both December 31, 2011 and 2010. As part of
its trading activities, the Company may enter into purchased risk participations, but such activity is not matched, as discussed
herein related to CDS or TRS.
The Company has also entered into TRS contracts on loans. The Company’s TRS business consists of matched trades, such that
when the Company pays depreciation on one TRS, it receives the same amount on the matched TRS. As such, the Company does
not have any long or short exposure, other than credit risk of its counterparty which is mitigated through collateralization. The
Company typically receives initial cash collateral from the counterparty upon entering into the TRS and is entitled to additional
collateral if the fair value of the underlying reference assets deteriorate. At December 31, 2011 and 2010, there were $1.6 billion
and $969 million of outstanding and offsetting TRS notional balances, respectively. The fair values of the TRS derivative assets
and liabilities at December 31, 2011 were $20 million and $17 million, respectively, and related collateral held at December 31,
2011 was $285 million. The fair values of the TRS derivative assets and liabilities at December 31, 2010 were $34 million and
$32 million, respectively, and related collateral held at December 31, 2010 was $268 million.
Cash Flow Hedges
The Company utilizes a comprehensive risk management strategy to monitor sensitivity of earnings to movements in interest rates.
Specific types of funding and principal amounts hedged are determined based on prevailing market conditions and the shape of
the yield curve. In conjunction with this strategy, the Company may employ various interest rate derivatives as risk management
tools to hedge interest rate risk from recognized assets and liabilities or from forecasted transactions. The terms and notional
amounts of derivatives are determined based on management’s assessment of future interest rates, as well as other factors. At
December 31, 2011, the Company’s outstanding interest rate hedging relationships include interest rate swaps that have been
designated as cash flow hedges of probable forecasted transactions related to recognized floating rate loans.
Interest rate swaps have been designated as hedging the exposure to the benchmark interest rate risk associated with floating rate
loans. At December 31, 2011 and 2010, the maximum range of hedge maturities for hedges of floating rate loans was one to six
years, with the weighted average being 3.4 years and 3.5 years, respectively. Ineffectiveness on these hedges was not material
during the years ended December 31, 2011 and 2010. As of December 31, 2011, $304 million, net of tax, of the deferred net gains
on derivatives that are recognized in AOCI are expected to be reclassified to net interest income over the next twelve months in
connection with the recognition of interest income on these hedged items.
During the third quarter of 2008, the Company executed The Agreements on 30 million common shares of Coke. A consolidated
subsidiary of SunTrust owns 22.9 million Coke common shares and a consolidated subsidiary of the Bank owns 7.1 million Coke
common shares. These two subsidiaries entered into separate derivative contracts 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 common shares pursuant to the terms of The Agreements) did not constitute a sale of the Coke common shares under
U.S. GAAP for several reasons, including that ownership of the common shares was not legally transferred to the Counterparty.
The Agreements were zero-cost equity collars at inception, which caused the Agreements to be derivatives in their entirety. The
Company has designated The Agreements as cash flow hedges of the Company’s probable forecasted sales of its Coke common
shares, which are expected to occur between 6.5 years and 7 years from The Agreements’ effective date, 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 common shares under The Agreements, the Company has asserted that it is probable that it will
sell all of its Coke common shares at or around the settlement date of The Agreements. The Federal Reserve’s approval for Tier
1 capital treatment was significantly based on this expected disposition of the Coke common 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 recognized in AOCI and any ineffective portions recognized in trading income/(loss). None of the
components of The Agreements’ fair values are excluded from the Company’s assessments of hedge effectiveness. Potential sources
of ineffectiveness include changes in market dividends and certain early termination provisions. The Company recognized
ineffectiveness gains of $2 million during both years ended December 31, 2011 and 2010. Ineffectiveness gains were recognized
in trading income/(loss). Other than potential measured hedge ineffectiveness, no amounts are expected to be reclassified from
AOCI over the next twelve months and any remaining amounts recognized in AOCI will be reclassified to earnings when the
probable forecasted sales of the Coke common shares occur.