SunTrust 2007 Annual Report Download - page 54

In estimating the fair values for investment securities and most derivative financial instruments, we believe that independent,
third-party market prices are the best evidence of exit price and where available, base our estimates on such prices. If such
third-party market prices are not available on the exact securities that we own, fair values are based on the market prices of
similar instruments, third-party broker quotes or are estimated using industry-standard or proprietary models whose inputs
may be unobservable. When market observable data is not available, the valuation of financial instruments becomes more
subjective and involves substantial judgment. The need to use unobservable inputs generally results from the lack of market
liquidity for certain types of loans and securities, which results in diminished observability of both actual trades and
assumptions that would otherwise be available to value these instruments. The distressed market conditions, that began in the
third quarter of 2007 and have continued after year-end, have impacted our ability to obtain third-party pricing data for our
investments in SIVs and certain other ABS and collateralized debt obligations, particularly those backed by subprime or
Alt-A loans. Even when third-party pricing has been available, the reduced trading activity resulting from current market
conditions has challenged the observability of these quotations. When fair values are estimated based on internal models, we
will consider relevant market indices that correlate to the underlying collateral, along with assumptions such as liquidity
discounts, interest rates, prepayment speeds, default rates, loss severity rates and discount rates.
The fair values of loans held for investment recorded at fair value and loans held for sale are based on observable current
market prices in the secondary loan market in which loans trade, as either whole loans or as ABS. When securities prices are
obtained in the secondary loan market, we will translate these prices into whole loan prices by incorporating adjustments for
estimated credit enhancement costs, loan servicing fees and various other transformation costs, when material. The fair value
of a loan is impacted by the nature of the asset and the market liquidity and activity. When observable market prices are not
available, for example as a result of the current illiquidity in the market for certain loan products, we will use judgment and
estimate fair value using internal models. If broker pricing is available, despite the lack of market observable trades, we will
obtain broker pricing for a population of loans and extrapolate this data across a larger loan population. Even if limited
market data is available, the characteristics of the underlying loan collateral are critical to arriving at an appropriate fair value
in the current markets, such that any similarities that may otherwise be drawn may be questionable. When estimating fair
value, we will make assumptions about prepayment speeds, default rates, loss severity rates and liquidity discounts. Absent
comparable current market data, we believe that the fair value derived from these various approaches is a reasonable
approximation of the prices that we would receive to sell the loans.
The fair values of OREO and other repossessed assets are typically determined based on appraisals by third parties, less
estimated selling costs. Estimates of fair value are also required when performing an impairment analysis of goodwill,
intangible assets and long-lived assets. We review goodwill for impairment at the reporting unit level on an annual basis, or
more often if events or circumstances indicate the carrying value may not be recoverable. The goodwill impairment test
compares the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its
fair value an additional analysis must be performed to determine the amount, if any, by which goodwill is impaired. In
determining the fair value of our reporting units, we use discounted cash flow models which require assumptions about
growth rates of the reporting units and the cost of equity. To the extent that adequate data is available, other valuation
techniques relying on market data may be incorporated into the estimate of a reporting unit’s fair value. The selection and
weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining
the amount that is most representative of fair value. For long-lived assets, including intangible assets subject to amortization,
an impairment loss should be recognized if the carrying amount of the asset is not recoverable and exceeds its fair value. In
determining the fair value, management uses models which require assumptions about growth rates, the life of the asset, and/
or the market value of the assets. We test long-lived assets for impairment whenever events or changes in circumstances
indicate that our carrying amount may not be recoverable.
Income Taxes
We are subject to the income tax laws of the various jurisdictions where we conduct business and estimate income tax
expense based on amounts expected to be owed to these various tax jurisdictions. On a quarterly basis, we evaluate the
reasonableness of our effective tax rate based upon a current estimate of net income, tax credits, and the applicable statutory
tax rates expected for the full year. The estimated income tax expense is reported in the Consolidated Statements of Income.
Accrued taxes represent the net estimated amount due to or to be received from taxing jurisdictions either currently or in the
future and is reported in other liabilities on the Consolidated Balance Sheets. We assess the appropriate tax treatment of
transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and
maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to
changes in tax rates, interpretations of tax laws, the status of examinations by the taxing authorities, and newly enacted
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