SunTrust 2011 Annual Report Download - page 32
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MSRs is generally immediate, but any offsetting revenue benefit from more originations and the MSRs relating to the new loans
would generally be recognized over time. It is also possible that, because of economic conditions and/or a deteriorating housing
market similar to current market conditions, even if interest rates were to fall, mortgage originations may also fall or any increase
in mortgage originations may not be enough to offset the decrease in the MSRs value caused by the lower rates.
We typically use derivatives and other instruments to hedge our mortgage banking interest rate risk. We generally do not hedge
all of our risk, and we may not be successful in hedging any of the risk. Hedging is a complex process, requiring sophisticated
models and constant monitoring. We may use hedging instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that may
not perfectly correlate with the value or income being hedged. We could incur significant losses from our hedging activities. There
may be periods where we elect not to use derivatives and other instruments to hedge mortgage banking interest rate risk. For
additional information, see the “Noninterest Income” section in the MD&A in this Form 10-K.
As a financial services company, adverse changes in general business or economic conditions could have a material adverse
effect on our financial condition and results of operations.
The continuing weakness or further weakening in business and economic conditions generally or specifically in the principal
markets in which we do business could have one or more of the following adverse impacts on our business:
• A decrease in the demand for loans and other products and services offered by us;
• A decrease in the value of our LHFS or other assets;
• A loss of clients, reduced earnings, and/or a suppressed stock price could trigger an impairment of certain intangible
assets, such as goodwill;
• An increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy
laws or default on their loans or other obligations to us; or
• An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming
assets, net charge-offs, provision for credit losses, and valuation adjustments on LHFS.
Changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets
and obligations, and the availability and cost of capital and liquidity.
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity
prices, and other relevant market rates or prices. Interest rate risk, defined as the exposure of net interest income and MVE to
adverse movements in interest rates, is our primary market risk, and mainly arises from the structure of the balance sheet, which
includes all loans. Variable rate loans, prior to any hedging related actions, are approximately 55% of total loans and approximately
43% of total loans after giving consideration to hedging related actions. We are also exposed to market risk in our trading instruments,
investment portfolio, Coke common stock, MSRs, loan warehouse and pipeline, and debt and brokered deposits carried at fair
value. ALCO meets regularly and is responsible for reviewing our open positions and establishing policies to monitor and limit
exposure to market risk. The policies established by ALCO are reviewed and approved by our Board.
Given our business mix, and the fact that most of the assets and liabilities are financial in nature, we tend to be sensitive to market
interest rate movements and the performance of the financial markets. In addition to the impact of the general economy, changes
in interest rates or in valuations in the debt or equity markets could directly impact us in one or more of the following ways:
• The yield on earning assets and rates paid on interest-bearing liabilities may change in disproportionate ways;
• The value of certain balance sheet and off-balance sheet financial instruments or the value of equity investments that we
hold could decline;
• The value of assets for which we provide processing services could decline;
• The value of our pension plan assets could decline, thereby potentially requiring us to further fund the plan; or
• To the extent we access capital markets to raise funds to support our business, such changes could affect the cost of such
funds or the ability to raise such funds. Our net interest income is the interest we earn on loans, debt securities and other
assets we hold less the interest we pay on our deposits, long-term and short-term debt, and other liabilities. Net interest
income is a function of both our net interest margin - the difference between the yield we earn on our assets and the
interest rate we pay for deposits and our other sources of funding - and the amount of earning assets we hold. Changes
in either our net interest margin or the amount of earning assets we hold could affect our net interest income and our
earnings. Changes in interest rates can affect our net interest margin. Although the yield we earn on our assets and our
funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than
the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our
assets, so they may adjust faster in response to changes in interest rates. When interest rates rise, our funding costs may
rise faster than the yield we earn on our assets, causing our net interest margin to contract until the asset yield catches
up.