SunTrust 2007 Annual Report Download - page 32

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assets and liabilities at fair value as of January 1, 2007, in accordance with SFAS No. 157 and SFAS No. 159, we recorded in
earnings in the first quarter of 2007 changes in these instruments’ fair values, as well as changes in fair value of any
associated derivatives which would have otherwise been carried at fair value through earnings. Due to the unique retroactive
application of the transition provisions, we have provided the following table that reflects the impact to opening retained
earnings and first quarter earnings as a result of electing to carry these financial assets and financial liabilities at fair value
and adopting the new fair value measurement requirements:
For the three months ended March 31, 2007
Increase/(Decrease)
(Dollars in thousands)
January 1, 2007
Retained
Earnings
Net Interest
Income
Trading
Account
Profits and
Commissions
Mortgage
Production
Related
Income
Fixed rate debt ($197,165) $- ($19,150) $-
Related hedges - 21,965 13,062 -
Total (197,165) 21,965 (6,088) -
Investment securities (147,374) - 71,855 -
Related hedges - - 14,812 -
Total (147,374) - 86,667 -
Mortgage loans (44,197) - - (5,971)
Related hedges - - 1,063 -
Total (44,197) - 1,063 (5,971)
Securitization and trading assets 132 - (619) 1,846
Mortgage loan commitments1(10,943) - - (38,038)
($399,547) $21,965 $81,023 ($42,163)
1These amounts relate to the early adoption of SFAS No. 157.
Upon electing to carry these assets and liabilities at fair value, we began to economically hedge and/or trade these assets or
liabilities in order to manage the instrument’s fair value volatility and economic value. The following is a description of each
asset and liability class for which fair value has been elected, including the specific reasons for electing fair value and the
strategies for managing the assets and liabilities on a fair value basis. In association with adoption of the fair value standards,
we recorded a reduction of $399.5 million in retained earnings on January 1, 2007.
Fixed Rate Debt
The debt that we elected to carry at fair value was all of our fixed rate debt that had previously been designated in
qualifying fair value hedges using receive fixed/pay floating interest rate swaps, pursuant to the provisions of SFAS
No. 133. This population specifically included $3.5 billion of fixed-rate Federal Home Loan Bank (“FHLB”) advances
and $3.3 billion of publicly-issued debt. We elected to record this debt at fair value in order to align the accounting for
the debt with the accounting for the derivative without having to account for the debt under hedge accounting, thus
avoiding the complex and time consuming fair value hedge accounting requirements of SFAS No. 133. The reduction to
opening retained earnings from recording the debt at fair value was $197.2 million. This move to fair value introduced
potential earnings volatility due to changes in our credit spread that were not required to be valued under the SFAS
No. 133 hedge designation. We estimated credit spreads above LIBOR rates, based on trading levels of our debt in the
market as of each reporting date. Based on this methodology, we recognized a gain of approximately $157.5 million
during 2007 due to changes in our credit spread. All of the debt, along with the interest rate swaps previously designated
as hedges under SFAS No. 133, continues to remain outstanding.
During the year ended December 31, 2007, we consummated two fixed rate debt issuances. On September 10, 2007, we
issued $500 million of Senior Notes, which carried a fixed coupon rate of 6.00% and had a term of 10 years. We did not
enter into any hedges on this debt at issuance and, therefore, did not elect to carry the debt at fair value. On November 5,
2007, we issued $500 million of Senior Notes, which carried a fixed coupon rate of 5.25% and had a term of 5 years.
We did enter into hedges in connection with this debt issuance and as a result elected to carry this debt at fair value.
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