SunTrust 2010 Annual Report Download - page 78

Other Market Risk
Other sources of market risk include the risk associated with holding residential and commercial mortgage loans prior to
selling them into the secondary market, commitments to clients to make mortgage loans that will be sold to the secondary
market, and our investment in MSRs. We manage the risks associated with the residential and commercial mortgage loans
classified as held for sale (i.e., the warehouse) and our IRLCs on residential loans intended for sale. The warehouses and
IRLCs consist primarily of fixed and adjustable rate single family residential and commercial real estate. The risk associated
with the warehouses and IRLCs is the potential change in interest rates between the time the customer locks in the rate on the
anticipated loan and the time the loan is sold on the secondary market, which is typically 60-150 days.
We manage interest rate risk predominantly with interest rate swaps, futures, and forward sale agreements, where the
changes in value of the instruments substantially offset the changes in value of the warehouse and the IRLCs. The IRLCs on
residential mortgage loans intended for sale are classified as free standing derivative financial instruments and are not
designated as hedge accounting relationships.
MSRs are the present value of future net cash flows that are expected to be received from the mortgage servicing portfolio. The
value of MSRs is highly dependent upon the assumed prepayment speed of the mortgage servicing portfolio which is driven by the
level of certain key interest rates, primarily the 30-year current coupon par mortgage rate known as the par mortgage rate. Future
expected net cash flows from servicing a loan in the mortgage servicing portfolio would not be realized if the loan pays off earlier
than anticipated. Prepayment speeds have generally been slowing down given the current economic environment; however, the
level of prepayments began to pick up towards the second half of 2010, but the impact from increasing prepayments was offset by
additions to the MSR portfolio from new origination activity.
We historically have not actively hedged MSRs, but have managed the market risk through our overall asset/liability
management process with consideration to the natural counter-cyclicality of servicing and production that occurs as interest
rates rise and fall over time with the economic cycle as well as with securities AFS. However, as of January 1, 2009, we
designated the 2008 MSRs vintage and all future MSRs production at fair value. In addition, as of January 1, 2010, we
designated at fair value the remaining MSR portfolio of $604 million being carried at LOCOM. Upon designating the
remaining MSRs at fair value, we increased the carrying value of these MSRs by $145 million and recorded an increase in
retained earnings, net of taxes, of $89 million. The decision to designate the MSR portfolio at fair value, key economic
assumptions, and the sensitivity of the current fair value of the MSRs as of December 31, 2010 and 2009 is discussed in
greater detail in Note 9, “Goodwill and Other Intangible Assets” and Note 11, “Certain Transfers of Financial Assets,
Mortgage Servicing Rights and Variable Interest Entities”, to the Consolidated Financial Statements.
The MSRs being carried at fair value total $1.4 billion and $936 million as of December 31, 2010 and 2009, respectively, and
are managed within established risk limits and are monitored as part of various governance processes. We originated MSRs
with a fair value of $289 million and $682 million, at the time of origination, during the years ended December 31, 2010 and
2009, respectively. We recorded a decrease in fair value of $513 million for the year ended December 31, 2010, and an
increase in fair value of $66 million for the year ended December 31, 2009, including “decay” resulting from the realization
of expected monthly net servicing cash flows.
During the years ended December 31, 2010 and 2009, we recorded a loss in the Consolidated Statements of Income/(Loss)
related to fair value MSRs of $69 million (including decay of $240 million) and $22 million (including decay of $95
million), respectively, inclusive of the mark to market adjustments on the related hedges. We also recorded an impairment
recovery in the Consolidated Statements of Income/(Loss) of $199 million during the year ended December 31, 2009, related
to MSRs carried at LOCOM at the time.
We also have market risk from capital stock we hold in the FHLB of Atlanta and from capital stock we hold in the Federal
Reserve Bank. In order to be an FHLB member, we are required to purchase capital stock in the FHLB. In exchange,
members take advantage of competitively priced advances as a wholesale funding source and access grants and low-cost
loans for affordable housing and community-development projects, amongst other benefits. As of December 31, 2010, we
held a total of $298 million of capital stock in the FHLB. During 2010, we reduced our capital stock holdings in the FHLB
by $45 million. In order to become a member of the Federal Reserve System, regulations require that we hold a certain
amount of capital stock as a percentage of the Bank’s capital. During 2010, we held $391 million of Federal Reserve Bank
capital stock.
For a detailed overview regarding actions taken to address the risk from changes in equity prices associated with our
investment in Coke common stock, see “Investment in Common Shares of the Coca-Cola Company,” in this MD&A. We
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