SunTrust 2011 Annual Report Download - page 28
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critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic
conditions and how these economic predictions might impair the ability of our borrowers to repay their loans. As is the case with
any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately
estimate the impacts of factors that we do identify.
We might underestimate the credit losses inherent in our loan portfolio and have credit losses in excess of the amount reserved.
We might increase the allowance because of changing economic conditions, including falling home prices and higher
unemployment, or other factors such as changes in borrower behavior. As an example, borrowers may discontinue making payments
on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to
make the payments.
While we believe that our allowance for credit losses was adequate at December 31, 2011, there is no assurance that it will be
sufficient to cover future credit losses, especially if housing and employment conditions worsen. In the event of significant
deterioration in economic conditions, we may be required to build reserves in future periods, which would reduce our earnings.
For additional information, see the “Risk Management - Credit Risk Management” and “Critical Accounting Policies - Allowance
for Credit Losses” sections in the MD&A in this Form 10-K.
Our ALLL may not be adequate to cover our eventual losses.
Like other financial institutions, we maintain an ALLL to provide for loan defaults and nonperformance. Our ALLL is based on
our historical loss experience, as well as an evaluation of the risks associated with our loan portfolio, including the size and
composition of the loan portfolio, current economic conditions and geographic concentrations within the portfolio. The current
stress on the U.S. economy and the local economies in which we do business may be greater or last longer than expected, resulting
in, among other things, greater than expected deterioration in credit quality of our loan portfolio, or in the value of collateral
securing these loans. Our ALLL may not be adequate to cover eventual loan losses, and future provisions for loan losses could
materially and adversely affect our financial condition and results of operations. Additionally, in order to maximize the collection
of loan balances, we sometimes modify loan terms when there is a reasonable chance that an appropriate modification would allow
our client to continue servicing the debt. If such modifications ultimately are less effective at mitigating loan losses than we expect,
we may incur losses in excess of the specific amount of ALLL associated with a modified loan, and this would result in additional
provision for loan loss expense.
We may have more credit risk and higher credit losses to the extent our loans are concentrated by loan type, industry
segment, borrower type, or location of the borrower or collateral.
Our credit risk and credit losses can increase if our loans are concentrated in borrowers engaged in the same or similar activities
or in borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. We experienced
the effect of concentration risk in 2009 and 2010 when we incurred greater than expected losses in our residential real estate loan
portfolio due to a housing slowdown and greater than expected deterioration in residential real estate values in many markets,
particularly several Florida MSAs. As Florida is our largest banking state in terms of loans and deposits, continued deterioration
in real estate values and underlying economic conditions in those markets or elsewhere could result in materially higher credit
losses. Florida and other states in our footprint have suffered significant declines in home values and significant declines in
economic activity. A further deterioration in economic conditions, housing conditions, or real estate values in these states could
result in materially higher credit losses, including for our Home Equity portfolio. For additional information, see the "Loans",
"Allowance for Credit Losses", “Risk Management - Credit Risk Management” and “Critical Accounting Policies - Allowance
for Credit Losses” sections in the MD&A and Notes 6 and 7, "Loans" and "Allowance for Credit Losses", to the Consolidated
Financial Statements in this Form 10-K.
We will realize future losses if the proceeds we receive upon liquidation of nonperforming assets are less than the carrying
value of such assets.
Nonperforming assets are recorded on our financial statements at the estimated net realizable value that we expect to receive from
ultimately disposing of the assets. We could realize losses in the future as a result of deteriorating market conditions if the proceeds
we receive upon dispositions of nonperforming assets are less than the carrying value of such assets.
A downgrade in the U.S. government's sovereign credit rating, or in the credit ratings of instruments issued, insured or
guaranteed by related institutions, agencies or instrumentalities, could result in risks to us and general economic conditions
that we are not able to predict.
On August 5, 2011, S&P cut the U.S. government's sovereign credit rating of long-term U.S. federal debt to AA+ from AAA while
keeping its outlook negative. Further, Moody's lowered its outlook to "Negative" on June 2, 2011 and Fitch lowered its outlook
to "Negative" on November 28, 2011, where they both remain. As a result, there continues to be the perceived risk of a sovereign
credit ratings downgrade of the U.S. government, including the rating of U.S. Treasury securities. It is foreseeable that the ratings
and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly