SunTrust 2008 Annual Report Download - page 168

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
Estimating the fair value of the loan portfolio when loan sales and trading markets are illiquid, or for certain loan
types, nonexistent, requires significant judgment. Therefore, the estimated fair value can vary significantly
depending on a market participant’s ultimate considerations and assumptions. The final value yields a market
participant’s expected return on investment that is indicative of the current distressed market conditions, but it does
not take into consideration the Company’s estimated value from continuing to hold these loans or its lack of
willingness to transact at these estimated values.
The Company estimated fair value based on estimated future cash flows discounted, initially, at current origination
rates for loans with similar terms and credit quality, which derived an estimated value of approximately 98% on the
loan portfolio’s net carrying value. The initial estimated value in 2008 is a function of higher credit spreads,
partially offset by lower risk-free interest rates. However, the value derived from origination rates at the end of
2008 likely does not represent an exit price due to the current distressed market conditions; therefore, an
incremental market risk and liquidity discount ranging from 3% to 20%, depending on the nature of the loan, was
subtracted from the initial value in 2008 to reflect the illiquid and distressed market conditions as of December 31,
2008. The discounted value is a function of a market participant’s required yield in the current environment and is
not a reflection of the expected cumulative losses on the loans. Loan prepayments are used to adjust future cash
flows based on historical experience and prepayment model forecasts. The carrying amount of accrued interest
approximates its fair value. The value of long-term customer relationships is not permitted under U.S. GAAP to be
included in the estimated fair value.
(e) Deposit liabilities with no defined maturity such as demand deposits, NOW/money market accounts, and savings
accounts have a fair value equal to the amount payable on demand at the reporting date, i.e., their carrying
amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies
current interest rates to a schedule of aggregated expected maturities. The assumptions used in the discounted cash
flow analysis are expected to approximate those that market participants would use in valuing deposits. The value
of long-term relationships with depositors is not taken into account in estimating fair values.
(f) Fair values for foreign deposits, brokered deposits, short-term borrowings, and long-term debt are based on quoted
market prices for similar instruments or estimated using discounted cash flow analysis and the Company’s current
incremental borrowing rates for similar types of instruments.
Note 21 – Contingencies
The Company and its subsidiaries are parties to numerous claims and lawsuits arising in the course of their normal business
activities, some of which involve claims for substantial amounts. The Company’s experience has shown that the damages
often alleged by plaintiffs or claimants are grossly overstated, unsubstantiated by legal theory, and bear no relation to the
ultimate award that a court might grant. In addition, valid legal defenses, such as statutes of limitations, frequently result in
judicial findings of no liability by the Company. Because of these factors, the Company cannot provide a meaningful
estimate of the range of reasonably possible outcomes of claims in the aggregate or by individual claim. However, it is the
opinion of management that liabilities arising from these claims in excess of the amounts currently accrued, if any, will not
have a material impact to the Company’s financial condition or results of operations.
In September 2008, STRH and STIS entered into an “agreement in principle” with the Financial Industry Regulatory
Authority (“FINRA”) related to the sales and brokering of ARS by STRH and STIS regardless whether any claims have been
asserted by the investor. This agreement is non-binding and is subject to the negotiation of a final settlement. At this time
there is no final settlement with FINRA. Notwithstanding that fact, the Company announced in November that it will move
forward with ARS repurchases from essentially the same categories of investors who would have been covered by the
original term sheet with FINRA. Additionally, the Company has elected to purchase ARS from certain other investors not
addressed by the agreement. The Company expects the majority of the purchases will be completed by the end of the first
quarter of 2009, and it is possible that the purchases may be complete prior to any final settlement with FINRA. The total par
amount of ARS the Company expects to purchase is approximately $743 million, although the Company expects that calls or
redemptions of certain of the ARS could occur before or shortly after purchase by the Company which would reduce this
amount slightly. The fair value of ARS purchased pursuant to the pending settlement, net of calls and any fair value changes
is approximately $133.1 million and $48.2 million in trading securities and available for sale securities, respectively, at
December 31, 2008. The Company has determined that it has a probable loss pursuant to the provisions of SFAS No. 5 that
could be reasonably estimated at December 31, 2008 as the difference between the par amount and the estimated fair value of
ARS that the Company believes it will likely purchase from investors. This amount may change by the movement in fair
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