SunTrust 2012 Annual Report Download - page 191

Notes to Consolidated Financial Statements (Continued)
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pricing on these securities, the Company utilized a third party municipal bond yield curve for the lowest investment
grade bonds and priced each bond based on the yield associated with that maturity.
MBS – agency
MBS – agency includes pass-through securities and collateralized mortgage obligations issued by GSEs and U.S.
government agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae. Each security contains a guarantee by the
issuing GSE or agency. For agency MBS, 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.
MBS – private
Private MBS includes purchased interests in third party securitizations, as well as retained interests in Company-
sponsored securitizations of 2006 and 2007 vintage residential mortgages; including both prime jumbo fixed rate
collateral and floating rate collateral. At the time of purchase or origination, these securities had high investment
grade ratings, however, through the credit crisis, they have experienced a deterioration in credit quality leading to
downgrades to non-investment grade levels. Generally, the Company obtains pricing for its securities from an
independent pricing service. The Company evaluates third party pricing to determine the reasonableness of the
information relative to changes in market data, such as any recent trades, market information received from outside
market participants and analysts, and/or changes in the underlying collateral performance. Even though third party
pricing has been available, the Company continued to classify private MBS as level 3, as the Company believes that
this third party pricing relies on significant unobservable assumptions, as evidenced by a persistently wide bid-ask
price range and variability in pricing from the pricing services, particularly for the vintage and exposures held by
the Company.
Securities that are classified as AFS and are in an unrealized loss position are included as part of the Company's
quarterly OTTI evaluation process. See Note 5, “Securities Available for Sale,” for details regarding assumptions
used to assess impairment and impairment amounts recognized through earnings on private MBS.
CDO/CLO Securities
Level 2 securities AFS at December 31, 2011 consisted of a senior interest in third party CLOs for which independent
broker pricing based on market trades and/or from new issuance of similar assets was readily available. This interest
was repaid in full by the issuer during the second quarter of 2012. The Company’s investments in level 3 trading
CDOs consisted of senior ARS interests in Company-sponsored securitizations of trust preferred collateral. These
auctions continue to fail and the Company continues to make significant adjustments to valuation assumptions based
on information available from observable secondary market trading of similar term securities; therefore, the Company
continued to classify these as level 3 investments. During the second quarter of 2012, the Company began valuing
these interests by constructing a pricing matrix of values based on a range of overcollateralization levels that are
derived from discussions with the dealer community along with limited trade data. The price derived from the pricing
matrix is then adjusted for each security based on deal specific factors such as the percentage of collateral that is
considered to be at heightened risk for future deferral or default, and collateral specific prepayment expectations,
among other factors. See Note 10, "Certain Transfers of Financial Assets and Variable Interest Entities," for discussion
of the sensitivity of these interests to changes in the assumptions.
Asset-backed securities
Level 2 ABS classified as securities AFS are primarily interests collateralized by third party securitizations of 2009
through 2011 vintage auto loans. These ABS are either publicly traded or are 144A privately placed bonds. The
Company utilizes an independent pricing service to obtain fair values for publicly traded securities and similar
securities for estimating the fair value of the privately placed bonds. No significant unobservable assumptions were
used in pricing the auto loan ABS; therefore, the Company classified these bonds as level 2. Level 3 ABS classified
as securities AFS are valued based on third party pricing with significant unobservable assumptions. Additionally,
trading ARS are classified as level 2 due to observable market trades and bids for similar senior securities. Student
loan ABS held by the Company are generally collateralized by FFELP student loans, the majority of which benefit
from a maximum guarantee amount of 97%. For valuations of subordinate securities in the same structure, the
Company adjusts valuations on the senior securities based on the likelihood that the issuer will refinance in the near
term, a security’s level of subordination in the structure, and/or the perceived risk of the issuer as determined by
credit ratings or total leverage of the trust. These adjustments may be significant; therefore, the subordinate student
loan ARS held as trading assets continue to be classified as level 3.
Corporate and other debt securities
Corporate debt securities are predominantly comprised of senior and subordinate debt obligations of domestic
corporations and are classified as level 2. Other debt securities in level 3 primarily include bonds that are redeemable