SunTrust 2003 Annual Report Download - page 19

Annual Report 2003 SunTrust Banks, Inc. 17
Loans are considered impaired if, based on current informa-
tion and events, it is probable that SunTrust will be unable to
collect the scheduled payments of principal or interest according
to the contractual terms of the loan agreement. When a loan is
deemed impaired, impairment is measured by using the fair
value of the underlying collateral, the present value of the future
cash flows discounted at the effective interest rate stipulated in
the loan agreement, or the estimated market value of the loan.
In measuring the fair value of the collateral, management uses
assumptions (e.g., discount rate) and methodologies (e.g., com-
parison to the recent selling price of similar assets) consistent
with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers,
economic conditions, historical loss experience, or the condition
of the various markets in which collateral may be sold may affect
the required level of the allowance for loan losses and the associ-
ated provision for loan losses. Should cash flow assumptions or
market conditions change, a different amount may be recorded
for the allowance for loan losses and the associated provision for
loan losses. For additional discussion of the allowance for loan
losses see pages 27 through 30.
ESTIMATES OF FAIR VALUE
The estimation of fair value is significant to a number of
SunTrust’s assets, including trading assets, loans held for sale,
available-for-sale investment securities, mortgage servicing rights
(MSRs), other real estate owned (OREO), other repossessed
assets, as well as assets and liabilities associated with derivative
financial instruments. These are all recorded at either fair value or
at the lower of cost or fair value. Fair values are volatile and may
be influenced by a number of factors. Circumstances that could
cause estimates of the fair value of certain assets and liabilities
to change include a change in prepayment speeds, discount
rates, or market interest rates.
Fair values for trading assets, most available-for-sale
investment securities and most derivative financial instruments
are based on quoted market prices. If quoted market prices are
not available, fair values are based on the quoted prices of simi-
lar instruments. The fair values of loans held for sale are based
on anticipated liquidation values, while the fair values of mort-
gage servicing rights are based on discounted cash flow analysis
utilizing dealer consensus prepayment speeds and market
discount rates. The fair values of other real estate owned are
typically determined based on appraisals by third parties, less
estimated selling costs.
Estimates of fair value are also required in performing an
impairment analysis of goodwill. The Company reviews goodwill
for impairment at least once annually and whenever events or
circumstances indicate the carrying value may not be recover-
able. An impairment would be indicated if the carrying value
exceeds the fair value of a reporting unit.
RECENT ACCOUNTING DEVELOPMENTS
The Company adopted the provisions of several new accounting
pronouncements in the current year, including Statement of
Financial Accounting Standards (SFAS) Nos. 146, 149, 150
and the recognition and requirements of Financial Accounting
Standards Board Interpretation (FIN) Nos. 45 and 46. The pro-
visions of these pronouncements and the related impact to the
Company are discussed in the Accounting Policies Adopted sec-
tion of Note 1 to the Consolidated Financial Statements
beginning on page 62.
BUSINESS SEGMENTS
Beginning in January 2001, the Company implemented signifi-
cant changes to its internal management reporting system to
begin to measure and manage certain business activities by line
of business. For more financial details on business segment dis-
closures, please see Note 22 – Business Segment Reporting in
the Notes to the Financial Statements. The lines of business
which are the Company’s segments are defined as follows:
RETAIL
The Retail line of business includes loans, deposits, and other
fee-based services for consumer and private banking clients, as
well as business clients with less than $5 million in sales. Retail
serves clients through an extensive network of traditional and in-
store branches, ATMs, the Internet (www.SunTrust.com) and the
telephone (1-800-SUNTRUST). In addition to serving the retail
market, the Retail line of business serves as an entry point for
other lines of business. When client needs change and expand,
Retail refers clients to the Private Client Services, Mortgage and
Commercial lines of business.
COMMERCIAL
The Commercial line of business provides clients with a full array
of financial solutions including traditional commercial lending,
treasury management, financial risk management products and
corporate card services. The primary customer segments served
by this line of business include “Commercial” ($5 million to
$50 million in annual revenue), “Middle Market” ($50 million
to $250 million in annual revenue), “Commercial Real Estate”
(entities that specialize in Commercial Real Estate activities),
and “Government/Not-for-Profit” entities. Also included in this
segment are specialty groups that operate both within and out-
side of the SunTrust footprint such as Affordable Housing (tax
credits related to community development) and Premium
Assignment Corporation (insurance premium financing).