SunTrust 2006 Annual Report Download - page 92

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SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
Company typically classifies loans as nonaccrual when one of the following events occurs: (i) interest or
principal has been in default 90 days or more, unless the loan is well-secured and in the process of
collection; (ii) collection of recorded interest or principal is not anticipated; or (iii) income for the loan
is recognized on a cash basis due to the deterioration in the financial condition of the debtor. Consumer
and residential mortgage loans are typically placed on nonaccrual when payments have been in default
for 90 and 120 days or more, respectively.
When a loan is placed on nonaccrual, unpaid interest is reversed against interest income. Interest income
on nonaccrual loans, if recognized, is either recorded using the cash basis method of accounting or
recognized at the end of the loan after the principal has been reduced to zero, depending on the type of
loan. If and when borrowers demonstrate the ability to repay a loan in accordance with the contractual
terms of a loan classified as nonaccrual, the loan may be returned to accrual status. If a nonaccrual loan
is returned to accruing status, the accrued interest at the date the loan is placed on nonaccrual status, and
foregone interest during the nonaccrual period, are recorded as interest income only after all principal
has been collected for commercial loans. For consumer loans and residential mortgage loans, the
accrued interest at the date the loan is placed on nonaccrual status, and forgone interest during the
nonaccrual period, are recorded as interest income as of the date the loan no longer meets the applicable
criteria. (See “Allowance for Loan and Lease Losses” section of this Note for further discussion of
impaired loans.)
Fees and incremental direct costs associated with the loan origination and pricing process, as well as
premiums and discounts, are deferred and amortized as level yield adjustments over the respective loan
terms. Fees received for providing loan commitments that result in loans are deferred and then
recognized over the term of the loan as an adjustment of the yield.
Allowance for Loan and Lease Losses
The Company’s allowance for loan and lease losses is the amount considered adequate to absorb
probable losses within the portfolio based on management’s evaluation of the size and current risk
characteristics of the loan portfolio. Such evaluation considers prior loss experience, the risk rating
distribution of the portfolios, the impact of current internal and external influences on credit loss and the
levels of nonperforming loans. Specific allowances for loan and lease losses are established for large
impaired loans and leases on an individual basis. The specific allowance established for these loans and
leases is based on a thorough analysis of the most probable source of repayment, including the present
value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair
value of the underlying collateral. General allowances are established for loans and leases that can be
grouped into pools based on similar characteristics. In this process, general allowance factors are based
on an analysis of historical charge-off experience and expected losses given default derived from the
Company’s internal risk rating process. These factors are developed and applied to the portfolio in terms
of line of business and loan type. Adjustments are also made to the allowance for the pools after an
assessment of internal and external influences on credit quality that have not yet been reflected in the
historical loss or risk rating data. Unallocated allowances relate to inherent losses that are not otherwise
evaluated in the first two elements. The qualitative factors associated with unallocated allowances are
subjective and require a high degree of management judgment. These factors include the inherent
imprecisions in mathematical models and credit quality statistics, recent economic uncertainty, losses
incurred from recent events, and lagging or incomplete data.
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