SunTrust 2007 Annual Report Download - page 141

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
asset/liability management strategies, the Company evaluated the composition of the mortgage loan portfolio, particularly in
light of its plans to no longer hold the above mentioned mortgage loans in its portfolio, as well as its expectation to begin to
record at fair value substantially all newly-originated mortgage loans held for sale in the second quarter of 2007. Based on
this evaluation, the Company elected to carry $4.1 billion of these types of loans held in the loan portfolio at fair value as of
January 1, 2007 and transferred these loans to held for sale at the end of the first quarter. The loans that the Company elected
to move to fair value were not owned by a REIT and had a weighted average coupon rate of approximately 4.9%. These
loans were all performing loans and virtually none had been past due 30 days or more over the prior 12 month period. The
reduction to opening retained earnings related to these loans was $44.2 million, which was net of a $4.1 million reduction in
the allowance for loan losses related to these loans. In connection with recording these loans at fair value, the Company
entered into hedging activities to mitigate the earnings volatility from changes in the loans’ fair value. During the twelve
months ended December 31, 2007, the Company sold or securitized $3.4 billion of the $4.1 billion of mortgage loans
transferred to loans held for sale that, in the aggregate and including the hedging gains and losses, approximated the fair
value of the mortgage loans at March 31, 2007, and terminated the interest rate derivatives it had entered into as hedges of
the fair value. As of December 31, 2007, $0.5 billion of the $4.1 billion in initially fair valued mortgage loans remained
outstanding.
In the second quarter of 2007, the Company began recording at fair value certain newly-originated mortgage loans held for sale
based upon defined product criteria. SunTrust chose to fair value these mortgage loans held for sale in order to eliminate the
complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying
economic changes in value of the loans and related hedge instruments. During 2007, the Company elected to record at fair value
$27.4 billion of mortgage loans and classified these loans as held for sale. As of December 31, 2007, there were $5.9 billion of
newly-originated mortgage loans at fair value held for sale. This election impacts the timing and recognition of origination fees
and costs, as well as servicing value. Specifically, origination fees and costs, which had been appropriately deferred under SFAS
No. 91 and recognized as part of the gain/loss on sale of the loan, are now recognized in earnings at the time of origination. For
the twelve months ended December 31, 2007, approximately $79 million of loan origination fees were recognized in noninterest
income and approximately $78 million of loan origination costs were recognized in noninterest expense due to this fair value
election. The servicing value, which had been recorded at the time the loan was sold as MSRs, is now included in the fair value
of the loan and recognized at origination of the loan. The Company began using derivatives to economically hedge changes in
servicing value as a result of including the servicing value in the fair value of the loan. The estimated impact from recognizing
servicing value, net of related hedging costs, as part of the fair value of the loan is captured in mortgage production income.
In the course of normal business, the Company may elect to transfer certain fair valued mortgage loans held for sale to
mortgage loans held for investment. During the year ended December 31, 2007, approximately $221.0 million of such loans
were transferred from mortgage loans held for sale to mortgage loans held for investment due to a change of management’s
intent with respect to these loans.
Securitization and Trading Loans
As part of its securitization and trading activities, the Company often warehouses assets prior to sale or securitization, retains
interests in securitizations, and maintains a portfolio of loans that it trades in the secondary market. At January 1, 2007, the
Company transferred to trading assets approximately $600 million of loans, substantially all of which were purchased from
the market for the purpose of sales into securitizations, which were previously classified as loans held for sale. Pursuant to
the provisions of SFAS No. 159, the Company elected to carry warehoused and trading loans at fair value in order to reflect
the active management of these positions and, in certain cases, to align the economics of these instruments with the hedges
that the Company typically executes on certain of these loans. The Company also elected to reclassify its residual interests to
trading assets, consistent with other residual positions the Company owns. As of December 31, 2007, approximately $107
million of the $600 million of trading loans transferred into trading assets as of January 1, 2007 remained outstanding, and
additional loans were purchased and recorded at fair value as part of the Company’s normal loan securitization and trading
activities.
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