SunTrust 2013 Annual Report Download - page 196

Notes to Consolidated Financial Statements, continued
180
Fair Value Gain/(Loss) for the Year Ended
December 31, 2011, for Items Measured at Fair Value
Pursuant to Election of the FVO
(Dollars in millions)
Trading
income
Mortgage
Production
Related
Income/(Loss) 1
Mortgage
Servicing
Related
Income
Total Changes
in Fair Values
Included in
Current
Period
Earnings 2
Assets:
Trading loans $21 $— $— $21
LHFS (10) 179 — 169
LHFI 311—14
MSRs — 7 (733) (726)
Liabilities:
Brokered time deposits 32 — — 32
Long-term debt (12) — — (12)
1 Income related to LHFS does not include income from IRLCs. For the year ended December 31, 2011, income related to MSRs includes MSRs recognized
upon the sale of loans reported at LOCOM.
2 Changes in fair value for the year ended December 31, 2011 exclude accrued interest for the period then ended. Interest income or interest expense on
trading loans, LHFS, LHFI, brokered time deposits, and long-term debt that have been elected to be carried at fair value are recognized in interest income
or interest expense in the Consolidated Statements of Income.
The following is a discussion of the valuation techniques and inputs used in developing fair value measurements for assets
and liabilities classified as level 2 or 3 that are measured at fair value on a recurring basis, based on the class of asset or liability
as determined by the nature and risks of the instrument.
Trading Assets and Derivatives and Securities Available for Sale
Unless otherwise indicated, trading assets are priced by the trading desk and securities AFS are valued by an independent
third party pricing service.
Federal agency securities
The Company includes in this classification securities issued by federal agencies and GSEs. Agency securities consist
of debt obligations issued by HUD, FHLB, and other agencies or collateralized by loans that are guaranteed by the
SBA and are, therefore, backed by the full faith and credit of the U.S. government. For SBA instruments, the Company
estimated fair value based on pricing from observable trading activity for similar securities or obtained fair values
from a third party pricing service; accordingly, the Company has classified these instruments as level 2.
U.S. states and political subdivisions
The Company’s investments in U.S. states and political subdivisions (collectively “municipals”) include obligations
of county and municipal authorities and agency bonds, which are general obligations of the municipality or are
supported by a specified revenue source. Holdings were geographically dispersed, with no significant concentrations
in any one state or municipality. Additionally, all but an immaterial amount of AFS municipal obligations classified
as level 2 are highly rated or are otherwise collateralized by securities backed by the full faith and credit of the federal
government.
Level 3 AFS municipal securities includes ARS purchased since the auction rate market began failing in February
2008 and have been considered level 3 securities due to the significant decrease in the volume and level of activity
in these markets, which has necessitated the use of significant unobservable inputs into the Company’s valuations.
These securities were valued based on comparisons to similar ARS for which auctions are currently successful and/
or to longer term, non-ARS issued by similar municipalities. The Company also evaluated the relative strength of
the municipality and made appropriate downward adjustments in price based on the credit rating of the municipality
as well as the relative financial strength of the insurer on those bonds. Although auctions for several municipal ARS
have been operating successfully, ARS owned by the Company at December 31, 2013, continued to be classified as
level 3 as they are those ARS for which the auctions continued to fail; accordingly, due to the uncertainty around the
success rates for auctions and the absence of any successful auctions for these identical securities, the Company
continued to price the ARS below par. Subsequent to December 31, 2013, the Company sold these remaining ARS
securities.
Level 3 AFS municipal securities also include bonds that are only redeemable with the issuer at par and cannot be
traded in the market. As such, no significant observable market data for these instruments is available. To estimate