SunTrust 2014 Annual Report Download - page 171

Notes to Consolidated Financial Statements, continued
148
Long-term debt
The Company has elected to measure at fair value certain fixed
rate debt issuances of public debt which are valued by obtaining
quotes from a third party pricing service and utilizing broker
quotes to corroborate the reasonableness of those marks.
Additionally, information from market data of recent observable
trades and indications from buy side investors, if available, are
taken into consideration as additional support for the value. Due
to the availability of this information, the Company determined
that the appropriate classification for the debt is level 2. The
election to fair value the debt was made to align the accounting
for the debt with the accounting for the derivatives without
having to account for the debt under hedge accounting, thus
avoiding the complex and time consuming fair value hedge
accounting requirements.
The Company’s public debt carried at fair value impacts
earnings predominantly through changes in the Company’s
credit spreads as the Company has entered into derivative
financial instruments that economically convert the interest rate
on the debt from a fixed to a floating rate. The estimated earnings
impact from changes in credit spreads above U.S. Treasury rates
were losses of $19 million and gains of $40 million and $78
million for the years ended December 31, 2014, 2013, and 2012,
respectively.
At December 31, 2014, the Company did not measure any
issued securities of a CLO at fair value. Previously, the Company
classified these types of securities as level 2, as the primary
driver of their fair values were the loans owned by the CLO,
which the Company also elected to measure at fair value prior
to the deconsolidation of the CLO, as discussed herein under
“Loans Held for Sale and Loans Held for Investment–Corporate
and other LHFS.”
Other liabilities
The Company’s other liabilities that are carried at fair value on
a recurring basis include contingent consideration obligations
related to acquisitions. Contingent consideration associated
with acquisitions is adjusted to fair value until settled. As the
assumptions used to measure fair value are based on internal
metrics that are not market observable, the earn-out is
considered a level 3 liability. Additionally, the derivative that
the Company obtained as a result of its sale of Visa Class B
shares was included in other liabilities at December 31, 2013.
This derivative was included in derivative contracts at
December 31, 2014 and accordingly, reclassified to derivative
contracts in the prior year level 3 assumptions and reconciliation
below for comparability.
The valuation technique and range, including weighted
average, of the unobservable inputs associated with the
Company's level 3 assets and liabilities are as follows:
Level 3 Significant Unobservable Input Assumptions
(Dollars in millions)
Fair value
December 31,
2014 Valuation Technique Unobservable Input 1Range
(weighted average)
Assets
Trading assets and derivatives:
Derivative contracts, net 2$20 Internal model Pull through rate 40-100% (75%)
MSR value 39-218 bps (107 bps)
Securities AFS:
U.S. states and political subdivisions 12 Cost N/A
MBS - private 123 Third party pricing N/A
ABS 21 Third party pricing N/A
Corporate and other debt securities 5 Cost N/A
Other equity securities 785 Cost N/A
Residential LHFS 1 Monte Carlo/Discounted
cash flow Option adjusted spread 145-225 (157 bps)
Conditional prepayment rate 1-30 CPR (15 CPR)
Conditional default rate 0-3 CDR (0.75 CDR)
LHFI 269 Monte Carlo/Discounted
cash flow Option adjusted spread 0-450 (286 bps)
Conditional prepayment rate 4-30 CPR (13.75 CPR)
Conditional default rate 0-7 CDR (1.75 CDR)
3 Collateral based pricing Appraised value NM 4
MSRs 1,206 Monte Carlo/Discounted
cash flow Conditional prepayment rate 2-47 CPR (11 CPR)
Option adjusted spread (1.34%)-122.1% (9.96%)
Liabilities
Other liabilities 327 Internal model Loan production volume 0-150% (107%)
1 For certain assets and liabilities where the Company utilizes third party pricing, the unobservable inputs and their ranges are not reasonably available to the Company, and therefore, have
been noted as not applicable, "N/A."
2 Represents the net of IRLC assets and liabilities entered into by the Mortgage Banking segment and includes the derivative liability associated with the Company's sale of Visa shares.
3 Input assumptions relate to the Company's contingent consideration obligations related to acquisitions. See Note 16, "Guarantees," for additional information.
4 Not meaningful.