SunTrust 2011 Annual Report Download - page 80
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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in detail in Note 1, “Significant Accounting Policies,” to the Consolidated
Financial Statements in this Form 10-K and are integral to understanding our financial performance. We have identified certain
accounting policies as being critical because (1) they require judgment about matters that are highly uncertain and (2) different
estimates that could be reasonably applied would result in materially different assessments with respect to ascertaining the valuation
of assets, liabilities, commitments, and contingencies. A variety of factors could affect the ultimate value that is obtained either
when earning income, recognizing an expense, recovering an asset, valuing an asset or liability, or reducing a liability. Our
accounting and reporting policies are in accordance with U.S. GAAP, and they conform to general practices within the financial
services industry. We have established detailed policies and control procedures that are intended to ensure that these critical
accounting estimates are well controlled, applied consistently from period to period, and the process for changing methodologies
occurs in an appropriate manner. The following is a description of our current critical accounting policies.
Contingencies
We face uncertainty with respect to the ultimate outcomes of various contingencies including the Allowance for Credit Losses,
mortgage repurchase reserves, and legal and regulatory matters.
Allowance for Credit Losses
The Allowance for Credit Losses is composed of the ALLL and the reserve for unfunded commitments. The ALLL represents our
estimate of probable losses inherent in the existing loan portfolio. The ALLL is increased by the provision for credit losses and
reduced by loans charged off, net of recoveries. The ALLL is determined based on our review and evaluation of larger loans that
meet our definition of impairment and the current risk characteristics of pools of homogeneous loans (i.e., loans having similar
characteristics) within the loan portfolio and our assessment of internal and external influences on credit quality that are not fully
reflected in the historical loss or risk-rating data.
Large commercial nonaccrual loans and certain commercial, consumer, and residential loans whose terms have been modified in
a TDR, are individually evaluated to determine the amount of specific allowance required using the most probable source of
repayment, including the present value of the loan's expected future cash flows, the fair value of the underlying collateral less
costs of disposition, or the loan's estimated market value. In these measurements, we use assumptions and methodologies that are
relevant to estimating the level of impairment and unrealized losses in the portfolio. To the extent that the data supporting such
assumptions has limitations, our judgment and experience play a key role in enhancing the specific ALLL estimates. Key judgments
used in determining the ALLL include internal risk ratings, market and collateral values, discount rates, loss rates, and our view
of current economic conditions.
General allowances are established for loans and leases grouped into pools that have similar characteristics, including smaller
balance homogeneous loans. The ALLL Committee estimates probable losses by evaluating quantitative and qualitative factors
for each loan portfolio segment, including net charge-off trends, internal risk ratings, changes in internal risk ratings, loss forecasts,
collateral values, geographic location, delinquency rates, nonperforming and restructured loans, origination channel, product mix,
underwriting practices, industry conditions, and economic trends. In addition to these factors, the consumer and residential portfolio
segments consider borrower FICO scores and the commercial portfolio segment considers single name borrower concentration.
Estimated collateral valuations are based on appraisals, broker price opinions, recent sales of foreclosed properties, automated
valuation models, other property-specific information, and relevant market information, supplemented by our internal property
valuation professionals. The value estimate is based on an orderly disposition and marketing period of the property. In limited
instances, we adjust externally provided appraisals for justifiable and well supported reasons, such as an appraiser not being aware
of certain property-specific factors or recent sales information. Appraisals generally represent the “as is” value of the property but
may be adjusted based on the intended disposition strategy of the property.
Our determination of the ALLL for commercial loans and leases is sensitive to the assigned internal risk ratings for PD and LGD.
Assuming a downgrade of one level in the PD risk ratings for commercial loans and leases, the ALLL would have increased by
approximately $520 million at December 31, 2011. In the event that estimated loss severity rates for the entire commercial loan
portfolio increased by 10 percent, the ALLL for the commercial portfolio would increase by approximately $90 million at December
31, 2011. Our determination of the allowance for residential and consumer loans is also sensitive to changes in estimated loss
severity rates. In the event that estimated loss severity rates for the residential and consumer loan portfolio increased by 10 percent,
the ALLL for the residential and consumer portfolios would increase, in total, by approximately $110 million at December 31,
2011. Because several quantitative and qualitative factors are considered in determining the ALLL, these sensitivity analyses do