SunTrust 2011 Annual Report Download - page 73
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For the year ended December 31, 2011, the average yield on a FTE basis for the securities AFS portfolio increased to 3.26%
compared with 3.21% for the year ended December 31, 2010. The yield increases were predominantly due to reduced holdings
of lower yielding U.S. Treasury securities and increased holdings of higher yielding agency MBS securities during 2011.
The portfolio’s effective duration decreased to 2.3% as of December 31, 2011 from 3.3% as of December 31, 2010. Effective
duration is a measure of price sensitivity of a bond portfolio to an immediate change in market interest rates, taking into
consideration embedded options. An effective duration of 2.3% suggests an expected price change of 2.3% for a one percent
instantaneous change in market interest rates.
The credit quality of the securities portfolio remained strong at December 31, 2011 and, consequently, we have the flexibility
to respond to changes in the economic environment and take actions as opportunities arise to manage our interest rate risk
profile and balance liquidity against investment returns.
Over the longer term, we continue to expect that a growing economy will result in loan balances trending up and deposits
trending down. Accordingly, we may eventually decrease the size of our securities portfolio in response to loan growth and/
or declining deposits.
INVESTMENT IN COMMON SHARES OF THE COCA-COLA COMPANY
Background
We have owned common shares of Coke since 1919, when one of our predecessor institutions participated in the underwriting
of Coke’s IPO and received common shares of Coke in lieu of underwriting fees. These shares have grown in value over the
past 92 years and have been classified as securities AFS, with unrealized gains, net of tax, recorded as a component of
shareholders’ equity. Because of the low accounting cost basis of these shares, we have accumulated significant unrealized
gains in shareholders’ equity. As of December 31, 2011, we owned 30 million Coke shares with an accounting cost basis of
$69,295 and a fair market value of $2.1 billion.
We commenced a comprehensive balance sheet review initiative in early 2007 in an effort to improve liquidity and capital
efficiency. As part of this initiative, we began to formally evaluate the capital efficiency of our holdings of Coke common
shares, as we were prohibited from including the market value of our investment in Coke common shares in Tier 1 capital in
accordance with Federal Reserve capital adequacy rules. As a result of this initiative, at various times during 2007 and 2008
we sold and made a charitable contribution of all but 30 million shares of our Coke stock. Additionally, during the second
half of 2008, we executed The Agreements on the remaining 30 million shares that we owned. Our primary objective in
executing these transactions was to optimize the benefits we obtained from our long-term holding of this asset, including the
capital treatment by bank regulators.
We entered into The Agreements, which were comprised of two variable forward agreements and share forward agreements
effective July 15, 2008 with a major, unaffiliated financial institution (the “Counterparty”) collectively covering our 30 million
Coke shares. Under The Agreements, we must deliver to the Counterparty at settlement of the variable forward agreements
either a variable number of Coke common shares or a cash payment in lieu of such shares. The Counterparty is obligated to
settle The Agreements for no less than approximately $38.67 per share, or approximately $1.16 billion in the aggregate (the
“Minimum Proceeds”). The share forward agreements give us the right, but not the obligation, to sell to the Counterparty, at
prevailing market prices at the time of settlement, any of the 30 million Coke common shares that are not delivered to the
Counterparty in settlement of the variable forward agreements. The Agreements effectively ensure that we will be able to sell
our 30 million Coke common shares at a price no less than approximately $38.67 per share, while permitting us to participate
in future appreciation in the value of the Coke common shares up to approximately $66.02 per share and approximately $65.72
per share, under each of the respective Agreements. The value of The Agreements represent a $189 million liability to us at
December 31, 2011.
During the terms of The Agreements, and until we sell the 30 million Coke common shares, we generally will continue to
receive dividends as declared and paid by Coke and will have the right to vote such shares. However, the amounts payable
to us under The Agreements will be adjusted if actual dividends are not equal to amounts expected at the inception of the
derivative.
Contemporaneously with entering into The Agreements, the Counterparty invested in senior unsecured promissory notes
issued by the Bank and SunTrust (collectively, the “Notes”) in a private placement in an aggregate principal amount equal to
the Minimum Proceeds. The Notes carry stated maturities of approximately ten years from the effective date and bear interest
at one-month LIBOR plus a fixed spread. The Counterparty pledged the Notes to us and we pledged the 30 million Coke
common shares to the Counterparty, securing each entity’s respective obligations under The Agreements. The pledged Coke
common shares are held by an independent third party custodian and the Counterparty is prohibited under The Agreements