SunTrust 2014 Annual Report Download - page 162

Notes to Consolidated Financial Statements, continued
139
NOTE 18 - FAIR VALUE ELECTION AND MEASUREMENT
The Company measures certain assets and liabilities at fair value
and classifies them as level 1, 2, or 3 within the fair value
hierarchy, as shown below, on the basis of whether the
measurement employs observable or unobservable inputs.
Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s own assumptions taking into account information
about market participant assumptions that is readily available.
• Level 1: Quoted prices for identical instruments in active
markets.
• Level 2: Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers
are observable in active markets.
• Level 3: Valuations derived from valuation techniques in
which one or more significant inputs or significant value
drivers are unobservable.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The
Company’s recurring fair value measurements are based on a
requirement to measure such assets and liabilities at fair value
or the Company’s election to measure certain financial assets
and liabilities at fair value. Assets and liabilities that are required
to be measured at fair value on a recurring basis include trading
securities, securities AFS, and derivative financial instruments.
Assets and liabilities that the Company has elected to measure
at fair value on a recurring basis include MSRs and certain
LHFS, LHFI, trading loans, brokered time deposits, and
issuances of fixed rate debt.
The Company elects to measure certain assets and liabilities
at fair value to more accurately align its financial performance
with the economic value of actively traded or hedged assets or
liabilities. The use of fair value also enables the Company to
mitigate non-economic earnings volatility caused from financial
assets and liabilities being carried at different bases of
accounting, as well as to more accurately portray the active and
dynamic management of the Company’s balance sheet.
The Company uses various valuation techniques and
assumptions in estimating fair value. The assumptions used to
estimate the value of an instrument have varying degrees of
impact to the overall fair value of an asset or liability. This
process involves the gathering of multiple sources of
information, including broker quotes, values provided by
pricing services, trading activity in other identical or similar
securities, market indices, and pricing matrices. When
observable market prices for the asset or liability are not
available, the Company employs various modeling techniques,
such as discounted cash flow analyses to estimate fair value.
Models used to produce material financial reporting information
are validated prior to use, and following any material change in
methodology. Their performance is monitored quarterly, and
any material deterioration in model performance is addressed.
This review is performed by an internal group that reports to the
Corporate Risk Function.
The Company has formal processes and controls in place
to support the appropriateness of its fair value estimates. For
fair values obtained from a third party or those that include
certain trader estimates of fair value, there is an independent
price validation function that provides oversight for these
estimates. For level 2 instruments and certain level 3
instruments, the validation generally involves evaluating
pricing received from two or more other third party pricing
sources that are widely used by market participants. The
Company evaluates this pricing information from both a
qualitative and quantitative perspective and determines whether
any pricing differences exceed acceptable thresholds. If these
thresholds are exceeded, then the Company assesses differences
in valuation approaches used, which may include contacting a
pricing service to gain further insight into the valuation of a
particular security or class of securities to resolve the pricing
variance, which could include an adjustment to the price used
for financial reporting purposes.
The Company classifies instruments within level 2 in the
fair value hierarchy when it determines that external pricing
sources estimated fair value using prices for similar instruments
trading in active markets. A wide range of quoted values from
pricing sources may imply a reduced level of market activity
and indicate that significant adjustments to price indications
have been made. In such cases, the Company evaluates whether
the asset or liability should be classified as level 3.
Determining whether to classify an instrument as level 3
involves judgment and is based on a variety of subjective factors
including whether a market is inactive. A market is considered
inactive if significant decreases in the volume and level of
activity for the asset or liability have been observed. In making
this determination the Company evaluates the number of recent
transactions in either the primary or secondary market, whether
price quotations are current, the nature of market participants,
the variability of price quotations, the breadth of bid/ask spreads,
declines in (or the absence of) new issuances, and the availability
of public information. When a market is determined to be
inactive, significant adjustments may be made to price
indications when estimating fair value. In making these
adjustments the Company seeks to employ assumptions a
market participant would use to value the asset or liability,
including consideration of illiquidity in the referenced market.