SunTrust 2011 Annual Report Download - page 195
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Please find page 195 of the 2011 SunTrust annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Notes to Consolidated Financial Statements (Continued)
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Trading loans
The Company engages in certain businesses whereby the election to carry loans at fair value for financial reporting aligns
with the underlying business purposes. Specifically, the loans that are included within this classification are: (i) loans
made or acquired in connection with the Company’s TRS business (see Note 11, "Certain Transfers of Financial Assets
and Variable Interest Entities," and Note 17, “Derivative Financial Instruments,” for further discussion of this business),
(ii) loans backed by the SBA, and (iii) the loan sales and trading business within the Company’s CIB line of business.
All of these loans have been classified as level 2, due to the market data that the Company uses in its estimates of fair
value.
The loans made in connection with the Company’s TRS business are short-term, demand loans, whereby the repayment
is senior in priority and whose value is collateralized. While these loans do not trade in the market, the Company believes
that the par amount of the loans approximates fair value and no unobservable assumptions are made by the Company to
arrive at this conclusion. At December 31, 2011 and 2010, the Company had outstanding $1.7 billion and $972 million,
respectively, of such short-term loans carried at fair value.
SBA loans are similar to SBA securities discussed herein under “Federal agency securities,” except for their legal form.
In both cases, the Company trades instruments that are fully guaranteed by the U.S. government as to contractual principal
and interest and has sufficient observable trading activity upon which to base its estimates of fair value.
The loans from the Company’s sales and trading business are commercial and corporate leveraged loans that are either
traded in the market or for which similar loans trade. The Company elected to carry these loans at fair value in order to
reflect the active management of these positions. The Company is able to obtain fair value estimates for substantially all
of these loans using a third party valuation service that is broadly used by market participants. While most of the loans
are traded in the markets, the Company does not believe that trading activity qualifies the loans as level 1 instruments,
as the volume and level of trading activity is subject to variability and the loans are not exchange-traded, such that the
Company believes that level 2 is a more appropriate presentation of the underlying market activity for the loans. At
December 31, 2011 and 2010, $323 million and $381 million, respectively, of loans related to the Company’s trading
business were held in inventory.
Loans and Loans Held for Sale
Residential LHFS
The Company recognized at fair value certain newly-originated mortgage LHFS based upon defined product criteria.
The Company chooses to fair value these mortgage LHFS 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. This election impacts the timing and recognition of origination fees and costs, as
well as servicing value. Specifically, origination fees and costs are recognized in earnings when earned or incurred. The
servicing value, which had been recorded as MSRs at the time the loan was sold, is included in the fair value of the loan
and initially recognized at the time the Company enters into IRLCs with borrowers. The Company uses derivatives to
economically hedge changes in servicing value as a result of including the servicing value in the fair value of the loan.
The mark to market adjustments related to LHFS and the associated economic hedges are captured in mortgage production
related (loss)/income.
Level 2 LHFS are primarily agency loans which trade in active secondary markets and are priced using current market
pricing for similar securities adjusted for servicing and risk. Level 3 loans are primarily non-agency residential mortgages
for which there is little to no observable trading activity of similar instruments in either the new issuance or secondary
loan markets as either whole loans or as securities. Prior to the non-agency residential loan market disruption, which
began during the third quarter of 2007 and continues, the Company was able to obtain certain observable pricing from
either the new issuance or secondary loan market. However, as the markets deteriorated and certain loans were not actively
trading as either whole loans or as securities, the Company began employing the same alternative valuation methodologies
used to value level 3 residential MBS to fair value the loans.
As disclosed in the tabular level 3 rollforwards, transfers of certain mortgage LHFS into level 3 during 2011 were not
due to using alternative valuation approaches, but were largely due to borrower defaults or the identification of other loan
defects impacting the marketability of the loans.
For residential loans that the Company has elected to carry at fair value, the Company has considered the component of
the fair value changes due to instrument-specific credit risk, which is intended to be an approximation of the fair value
change attributable to changes in borrower-specific credit risk. For the years ended December 31, 2011, 2010, and 2009,
the Company recognized losses in the Consolidated Statements of Income/(Loss) of $15 million, $18 million, and $24