SunTrust 2010 Annual Report Download - page 86

Level 3 trading assets declined by $181 million, or 46%, during the year ended December 31, 2010, primarily due to sales,
paydowns, redemptions, and maturities of securities, partially offset by net unrealized mark to market gains and a small
amount of purchases. Level 3 securities AFS declined by $186 million, or 14%, during the year ended December 31, 2010,
due to continued paydowns and redemptions by issuers of securities, partially offset by net unrealized mark to market gains
and a small amount of ARS purchases. Both level 3 securities AFS and trading assets were also reduced by a transfer of
senior level student loan ARS and a CLO preference share position out of level 3 into level 2 totaling $93 million of
securities AFS and $34 million of trading assets during the year ended December 31, 2010. During the year ended
December 31, 2010, we recognized through earnings $84 million in net gains related to trading assets and liabilities and
securities AFS classified as level 3.
Loans
The fair values of LHFI and LHFS are based on observable current market prices in the secondary loan market in which
loans trade, as either whole loans or as ABS. When securities prices are obtained in the secondary loan market, we will
translate these prices into whole loan prices by incorporating adjustments for estimated credit enhancement costs, loan
servicing fees, and various other transformation costs, when material. The fair value of a loan is impacted by the nature of the
asset and the market liquidity. When estimating fair value for loans that do not trade in an active market, we will make
assumptions about prepayment speeds, default rates, loss severity rates, and liquidity discounts. Absent comparable current
market data, we believe that the fair value derived from these various approaches is a reasonable approximation of the prices
that we would receive upon sale of the loans.
Level 3 loans are primarily non-agency residential mortgage loans for which there are little to no observable trades in either
the new issuance or secondary loan markets as either whole loans or as securities. Prior to the disruption in the non-agency
residential loan market, we were 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, we began employing the same alternative valuation methodologies used to value level 3 residential MBS to fair
value the mortgage loans. Transfers of certain mortgage LHFS into level 3 during 2010 were largely due to borrower defaults
or the identification of other loan defects impacting the marketability of the loans.
During the year ended December 31, 2010, we transferred $160 million of NPLs that were previously designated as LHFI to
LHFS; we subsequently sold the transferred NPLs at prices that approximated fair value. These loans were predominantly
reported at amortized cost prior to their transfer to LHFS. During the year ended December 31, 2010, we transferred $213
million of loans that were previously designated as LHFS to LHFI, as they were determined to be no longer marketable. Of
this amount, $147 million were loans for which fair value accounting had been elected; these loans will continue to be
reported at fair value within LHFI.
Other Intangible Assets and Other Assets
Beginning January 1, 2010, we began recording all MSRs at fair value on a recurring basis. The fair value of MSRs is based
on discounted cash flow analyses and can be highly variable quarter to quarter as market conditions and projected interest
rates change. We provide disclosure of the key economic assumptions used to measure MSRs and residual interests and a
sensitivity analysis to adverse changes to these assumptions in Note 11, “Certain Transfers of Financial Assets, Mortgage
Servicing Rights and Variable Interest Entities,” to the Consolidated Financial Statements. This sensitivity analysis does not
take into account hedging activities discussed in the “Other Market Risk” section of this MD&A.
The fair values of OREO and other repossessed assets are typically determined based on recent appraisals by third parties and
other market information. Our OREO properties are concentrated in Georgia, Florida, and North Carolina, therefore further
deterioration in property values in those states or changes to our disposition strategies could cause our estimates of OREO
values to decline which would result in further write-downs. Estimates of fair value are also required when performing an
impairment analysis of goodwill, intangible assets and long-lived assets. For long-lived assets, including intangible assets
subject to amortization, an impairment loss is recognized if the carrying amount of the asset is not recoverable and exceeds
its fair value. In determining the fair value, management uses models which require assumptions about growth rates, the life
of the asset, and/or the market value of the assets. We test long-lived assets for impairment whenever events or changes in
circumstances indicate that our carrying amount may not be recoverable.
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