SunTrust 2012 Annual Report Download - page 171

Notes to Consolidated Financial Statements (Continued)
155
Other changes in plan assets and benefit obligations recognized in OCI during 2012 were as follows:
(Dollars in millions)
Pension
Benefits Other Postretirement Benefits
Current year actuarial loss/(gain) $64 ($12)
Recognition of actuarial loss (25) —
Settlements (2)—
Total recognized in OCI, pre-tax $37 ($12)
Total recognized in net periodic benefit cost and OCI, pre-tax $11 ($12)
The estimated actuarial loss that will be amortized from AOCI into net periodic benefit cost in 2013 is $26 million.
Additionally, SunTrust sets pension asset values equal to their market value, in contrast to the use of a smoothed asset value that
incorporates gains and losses over a period of years. Utilization of market value of assets provides a more realistic economic
measure of the plan’s funded status and cost. Assumed discount rates and expected returns on plan assets affect the amounts of
net periodic benefit cost. A 25 basis point decrease in the discount rate or expected long-term return on plan assets would increase
all Pension and Other Postretirement Plans’ net periodic benefit cost approximately less than $1 million and $7 million , respectively.
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the Other Postretirement Benefit plans.
As of December 31, 2012, SunTrust assumed that pre-65 retiree health care costs will increase at an initial rate of 8.00% per year.
SunTrust assumed a healthcare cost trend that recognizes expected inflation, technology advancements, rising cost of prescription
drugs, regulatory requirements and Medicare cost shifting. SunTrust expects this annual cost increase to decrease over a 6-year
period to 5.00% per year. As of December 31, 2012, SunTrust assumed that post-65 retiree health costs will increase at an initial
rate of 7.50% per year. SunTrust expects this annual cost increase to decrease over a 5-year period to 5.00% per year.
Due to changing medical inflation, it is important to understand the effect of a one percentage point change in assumed healthcare
cost trend rates. These amounts are shown below:
(Dollars in millions) 1% Increase 1% Decrease
Effect on Other Postretirement Benefit obligation $11 ($9)
Effect on total service and interest cost1— —
1 Impact is less than $1 million.
NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into various derivative financial instruments, both in a dealer capacity to facilitate client transactions
and as an end user as a risk management tool. ALCO monitors all derivative activities. When derivatives have been entered
into with clients, the Company generally manages the risk associated with these derivatives within the framework of its VAR
approach that monitors total daily exposure and seeks to manage the exposure on an overall basis. Derivatives are used as a
risk management tool to hedge the Company’s balance sheet exposure to changes in identified cash flow and fair value risks,
either economically or in accordance with hedge accounting provisions. The Company’s Corporate Treasury function is
responsible for employing the various hedge accounting strategies to manage these objectives. Additionally, as a normal part
of its operations, the Company enters into IRLCs on mortgage loans that are accounted for as freestanding derivatives and
has certain contracts containing embedded derivatives that are carried, in their entirety, at fair value. All freestanding derivatives
and any embedded derivatives that the Company bifurcates from the host contracts are carried at fair value in the Consolidated
Balance Sheets in trading assets, other assets, trading liabilities, or other liabilities. The associated gains and losses are either
recognized in AOCI, net of tax, or within the Consolidated Statements of Income depending upon the use and designation of
the derivatives.
Credit and Market Risk Associated with Derivatives
Derivatives expose the Company to credit risk. The Company minimizes the credit risk of derivatives by entering into
transactions with counterparties with defined exposure limits based on credit quality that are reviewed periodically by the
Company’s Credit Risk Management division. The Company’s derivatives may also be governed by an ISDA master agreement,
and depending on the nature of the derivative, bilateral collateral agreements are typically in place as well. When the Company
has more than one outstanding derivative transaction with a single counterparty and there exists a legally enforceable master
netting agreement with that counterparty, the Company considers its exposure to the counterparty to be the net market value