SunTrust 2007 Annual Report Download - page 33

Available for Sale and Trading Securities
The available for sale debt securities that were transferred to trading were substantially all of the debt securities within
specific asset classes, whether the securities were valued at an unrealized loss or unrealized gain. We elected to
reclassify approximately $15.4 billion of securities to trading at January 1, 2007, as well as an additional $600 million
of purchases of similar assets that occurred during the first quarter of 2007. The reduction to opening retained earnings
related to reclassifying the $15.4 billion of securities to trading was $147.4 million. This net unrealized loss was already
reflected in accumulated other comprehensive income and, therefore, upon reclassification to retained earnings, there
was no net impact to total shareholders’ equity. Our securities portfolio is generally of high credit quality, such that the
opening retained earnings adjustment was not significantly impacted by the credit risk embedded in the assets, but rather
due to interest rates.
We elected to move these available for sale securities to trading securities in order to initially seed the trading securities
portfolio that we intended to actively manage in connection with the overall management of our balance sheet. The
transfer of securities to trading enabled us to more actively trade a more significant portion of our investment portfolio
and reduce the overall size of the available for sale portfolio. In determining the assets to be sold, we considered
economic factors, such as yield, collateral, interest terms, capital efficiency, and duration, in relation to our balance
sheet strategies. In evaluating our total available for sale portfolio of approximately $23 billion at January 1, 2007, we
determined that approximately $3 billion of securities were not available or were not practicable to be fair valued and
reclassified to trading under SFAS No. 159, as these securities had matured or been called during the quarter, were
subject to business restrictions, were privately placed or had nominal principal amounts. Approximately $5 billion of
securities aligned with our recent balance sheet strategy, due to the nature of the assets (such as 30-year fixed rate
mortgage backed securities (“MBS”), 10/1 adjustable rate mortgages (“ARMs”), floating rate asset backed securities
(“ABS”) and municipal bonds); therefore, the securities continued to be classified as available for sale. These securities
yielded over 5.6%, had a duration over 4.0%, and were in a $6.7 million net unrealized gain position as of January 1,
2007. The remaining $15.4 billion of securities, which included hybrid ARMs, commercial MBS, collateralized
mortgage obligations (“CMO”) and MBS (excluding those classes of MBS that remained classified as securities
available for sale), yielded approximately 4.5% and had a duration under 3.0%. The approximate $600 million of
securities that were purchased in the first quarter and originally classified as available for sale were similar to the
securities reclassified to trading on January 1, 2007 upon adoption of SFAS No. 159; accordingly, we reclassified these
securities to trading pursuant to the provisions of SFAS No. 159.
During the first quarter of 2007, in connection with our decision to early adopt SFAS No. 159, we purchased
approximately $1.7 billion of treasury bills, which were classified as trading securities, and approximately $3.2 billion
of 30-year fixed rate MBS, which were classified as securities available for sale. We entered into approximately $13.5
billion notional of interest rate derivatives to mitigate the fair value volatility of the available for sale securities that had
been reclassified to trading. Finally, as part of our asset/liability strategies, we executed an additional $7.5 billion
notional receive-fixed interest rate swaps that were designated as cash flow hedges under SFAS No. 133 on floating rate
commercial loans.
During the second quarter of 2007, we sold substantially all of the $16.0 billion in securities transferred to trading at
prices that, in the aggregate and including the hedging gains and losses, approximated the fair value of the securities at
March 31, 2007, and terminated the interest rate derivatives we had entered into as hedges of the fair value. We replaced
a portion of these securities with an additional $5.4 billion of treasury bills classified as trading and $1.8 billion of
30-year fixed rate MBS classified as available for sale. In addition, we reduced wholesale overnight funding by
approximately $4 billion. The 30-year fixed-rate MBS were a similar asset type to the securities that remained classified
as available for sale but were substantially different from the securities reclassified to trading as part of our adoption.
These securities yielded over 5.5% and had a duration of approximately 5.7%.
Subsequent to the transactions executed at the end of the first quarter and early second quarter, we continued to maintain
an active trading portfolio, as well as refine our trading securities strategies. As trading securities matured or sold, we
purchased additional trading securities that included longer dated agency debentures, commercial paper, ABS, corporate
bonds, etc. During the year ended December 31, 2007, we purchased approximately $23 billion of trading securities for
balance sheet management purposes. In addition, during 2007, we entered into $4.6 billion of FHLB letters of credit that
we elected to record at fair value and used these letters of credit to satisfy customer collateral and deposit requirements.
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