SunTrust 2011 Annual Report Download - page 197
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Please find page 197 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)
181
Liabilities
Trading liabilities
Trading liabilities are primarily comprised of derivative contracts, but also include various contracts involving U.S.
Treasury securities, Federal agency securities, and corporate debt securities that the Company uses in certain of its trading
businesses. The Company employs the same valuation methodologies for these derivative contracts and securities as are
discussed within the corresponding sections herein under “Trading Assets and Securities Available for Sale.”
Brokered time deposits
The Company has elected to measure certain CDs at fair value. These debt instruments include embedded derivatives
that are generally based on underlying equity securities or equity indices, but may be based on other underlyings that
may or may not be clearly and closely related to the host debt instrument. The Company elected to carry these instruments
at fair value in order to remove the mixed attribute accounting model for the single debt instrument or to better align the
economics of the CDs with the Company’s risk management strategies. The Company evaluated, on an instrument by
instrument basis, whether a new issuance would be carried at fair value.
The Company has classified these CDs as level 2 instruments due to the Company’s ability to reasonably measure all
significant inputs based on observable market variables. The Company employs a discounted cash flow approach to the
host debt component of the CD, based on observable market interest rates for the term of the CD and an estimate of the
Bank’s credit risk. For the embedded derivative features, the Company uses the same valuation methodologies as if the
derivative were a standalone derivative, as discussed herein under “Derivative contracts.”
For brokered time deposits carried at fair value, the Company estimated credit spreads above LIBOR, based on credit
spreads from actual or estimated trading levels of the debt or other relevant market data. The Company recognized gains
of $2 million, losses of $41 million, and losses of $2 million for the years ended December 31, 2011, 2010, and 2009,
respectively, due to changes in its own credit spread on its brokered time deposits carried at fair value.
Long-term debt
The Company has elected to carry at fair value certain fixed rate debt issuances of public debt which are valued by
obtaining quotes from a third party pricing service and utilizing broker quotes to corroborate the reasonableness of those
marks. Additionally, information from market data of recent observable trades and indications from buy side investors,
if available, are taken into consideration as additional support for the value. Due to the availability of this information,
the Company determined that the appropriate classification for the debt was level 2. The election to fair value the debt
was made in order to align the accounting for the debt with the accounting for the derivatives without having to account
for the debt under hedge accounting, thus avoiding the complex and time consuming fair value hedge accounting
requirements.
The Company’s public debt carried at fair value impacts earnings predominantly through changes in the Company’s credit
spreads as the Company has entered into derivative financial instruments that economically convert the interest rate on
the debt from fixed to floating. The estimated earnings impact from changes in credit spreads above U.S. Treasury rates
were gains of $57 million, losses of $95 million, and losses of $233 million for the years ended December 31, 2011,
2010, and 2009, respectively.
The Company also carries approximately $289 million of issued securities contained in a consolidated CLO at fair value
in order to recognize the nonrecourse nature of these liabilities to the Company. Specifically, the holders of the liabilities
are only paid interest and principal to the extent of the cash flows from the assets of the vehicle and the Company has no
current or future obligations to fund any of the CLO vehicle’s liabilities. The Company has classified these securities as
level 2, as the primary driver of their fair values are the loans owned by the CLO, which the Company has also elected
to carry at fair value, as discussed herein under “Loans and Loans Held for Sale – Corporate and other LHFS”.