SunTrust 2012 Annual Report Download - page 193

Notes to Consolidated Financial Statements (Continued)
177
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 purpose. 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 10, "Certain Transfers of
Financial Assets and Variable Interest Entities," and Note 16, “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 Wholesale Banking segment. All of these loans are classified as level 2, due to the market data that the
Company uses in the estimate 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, 2012 and 2011, the Company had outstanding $1.9 billion
and $1.7 billion, 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 there is sufficient observable trading activity upon which to base the estimate 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
since they are actively traded. The Company is able to obtain fair value estimates for substantially all of these loans
through a third party valuation service that is broadly used by market participants. While most of the loans are traded
in the market, 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, 2012 and 2011, $357 million and $323 million, respectively, of loans related to the Company’s trading
business were held in inventory.
All recognized gains or losses due to changes in fair value are attributable to instrument-specific credit risk.
Loans Held for Sale and Loans Held for Investment
Residential LHFS
The Company values certain newly-originated mortgage LHFS predominantly at fair value based upon defined
product criteria. The Company chooses to fair value these mortgage LHFS 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. Origination fees and costs are recognized in earnings when earned
or incurred. The servicing value 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 income/(loss).
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 and also include non-agency residential mortgages. Due
to the non-agency residential loan market disruption, which began during the third quarter of 2007, there was little
to no observable trading activity of similar instruments and the Company previously classified these LHFS as level
3. Due to increased trading activity in the secondary loan market, where the Company has been a market participant,
the Company has been able to obtain observable pricing and therefore, the Company reclassified these LHFS as level
2. As disclosed in the tabular level 3 rollforwards, transfers of certain mortgage LHFS into level 3 during 2012 and
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 considers 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 year ended December 31, 2012, the
Company recognized gains in the Consolidated Statements of Income of $12 million, due to changes in fair value
attributable to borrower-specific credit risk. For the years ended December 31, 2011 and 2010, the Company
recognized losses in the Consolidated Statements of Income of $15 million and $18 million, respectively, due to
changes in fair value attributable to borrower-specific credit risk. In addition to borrower-specific credit risk, there