SunTrust 2013 Annual Report Download - page 197

Notes to Consolidated Financial Statements, continued
181
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
Agency MBS 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
The Company’s investments in level 3 trading CDOs consisted of senior ARS interests in Company-sponsored
securitizations of trust preferred collateral. The auctions related to these securities 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 continues to classify these as level 3
investments. The Company values these interests utilizing a pricing matrix based on a range of overcollateralization
levels that is periodically updated based on discussions with the dealer community along with limited trade data.
Under this modified approach, at December 31, 2013 all CDO ARS were valued using a simplified discounted cash
flow approach that prices the securities to their expected maturity. The primary inputs and assumptions considered
by the Company in valuing these retained interests were overcollateralization levels (impacted by credit losses) and
the discount margin over LIBOR. See the level 3 assumptions table in this note, as well as Note 10, "Certain Transfers
of Financial Assets and Variable Interest Entities," for discussion of the sensitivity of these interests to changes in
the assumptions. Subsequent to December 31, 2013, the Company sold all of its level 3 investments in trading CDOs.
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,
any trading ARS are classified as level 2 due to observable market trades and bids for similar senior securities. These
ARS consisted of student loan ABS that were generally collateralized by FFELP student loans, the majority of which
benefited from a maximum guarantee amount of 97%. During 2013, the Company sold the remaining senior student
loan ARS. 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