BB&T 2013 Annual Report Download - page 37

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Securities
BB&T generally utilizes a third-party pricing service in determining the fair value of its AFS and trading securities. Fair
value measurements are derived from market-based pricing matrices that were developed using observable inputs that include
benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. Management
performs various procedures to evaluate the accuracy of the fair values provided by the third-party service provider. These
procedures, which are performed independent of the responsible LOB, include comparison of pricing information received
from the third party pricing service to other third party pricing sources, review of additional information provided by the third
party pricing service and other third party sources for selected securities and back-testing to compare the price realized on
any security sales to the daily pricing information received from the third party pricing service. The IPV committee, which
provides oversight to BB&T’s enterprise-wide IPV function, is responsible for oversight of the comparison of pricing
information received from the third party pricing service to other third party pricing sources, approving tolerance limits
determined by IPV for price comparison exceptions, reviewing significant changes to pricing and valuation policies and
reviewing and approving the pricing decisions made on any illiquid and hard-to-price securities. When market observable
data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is
subjective and may involve substantial judgment by management. As of December 31, 2013, BB&T had approximately $861
million of AFS securities valued using unobservable inputs, the majority of which were non-agency MBS securities that are
covered by a loss sharing agreement with the FDIC.
BB&T periodically reviews AFS securities with an unrealized loss. An unrealized loss exists when the current fair value of
an individual security is less than its amortized cost basis. The purpose of the review is to consider the length of time and the
extent to which the market value of a security has been below its amortized cost. The primary factors BB&T considers in
determining whether an impairment is other-than-temporary are long-term expectations and recent experience regarding
principal and interest payments and BB&T’s intent to sell and whether it is more likely than not that the Company would be
required to sell those securities before the anticipated recovery of the amortized cost basis.
MSRs
BB&T has a significant mortgage loan servicing portfolio and related MSRs. BB&T has two classes of MSRs for which it
separately manages the economic risk: residential and commercial. Residential MSRs are primarily carried at fair value with
changes in fair value recorded as a component of mortgage banking income. BB&T uses various derivative instruments to
mitigate the income statement effect of changes in fair value due to changes in valuation inputs and assumptions of its
residential MSRs. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do
occur, the precise terms and conditions typically are not readily available. Accordingly, BB&T estimates the fair value of
residential MSRs using an OAS valuation model to project MSR cash flows over multiple interest rate scenarios, which are
then discounted at risk-adjusted rates. The OAS model considers portfolio characteristics, contractually specified servicing
fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic
factors. BB&T reassesses and periodically adjusts the underlying inputs and assumptions in the OAS model to reflect market
conditions and assumptions that a market participant would consider in valuing the MSR asset.
Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience
and, when available, observable market data. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of
the valuation hierarchy. The value of MSRs is significantly affected by mortgage interest rates available in the marketplace,
which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs
declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of
rising interest rates, the value of MSRs generally increases due to reduced refinance activity. Commercial MSRs are carried
at the lower of cost or market and amortized over the estimated period that servicing income is expected to be received based
on projections of the amount and timing of estimated future cash flows. The amount and timing of servicing asset
amortization is based on actual results and updated projections. Refer to Note 6 “Loan Servicing” in the “Notes to
Consolidated Financial Statements” for quantitative disclosures reflecting the effect that changes in management’s
assumptions would have on the fair value of MSRs.