SunTrust 2011 Annual Report Download - page 84
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We evaluate the likelihood of a potential loss from legal or regulatory proceedings to which we are a party. We record a liability
for such claims when a loss is considered probable and the amount can be reasonably estimated. Significant judgment may be
required in the determination of both probability and whether an exposure is reasonably estimable. Our estimates are subjective
based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside
legal counsel. In many such proceedings, it is not possible to determine whether a liability has been incurred or to estimate the
ultimate or minimum amount of that liability until the matter is close to resolution. As additional information becomes available,
we reassess the potential liability related to pending claims and may revise our estimates.
Due to the inherent uncertainties of the legal and regulatory processes in the multiple jurisdictions in which we operate, our
estimates may be materially different than the actual outcomes, which could have material effects on our business, financial
conditions and results of operations. 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 adverse impact to the Company's financial condition, results of
operations, or cash flows. See Note 20, “Contingencies,” and Note 25, “Subsequent Event,” to the Consolidated Financial
Statements in this Form 10-K for further discussion.
Estimates of Fair Value
Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. Certain of our assets and liabilities are measured at fair value on a recurring basis. Examples of recurring uses of fair
value include derivative instruments, AFS and trading securities, certain LHFI and LHFS, certain issuances of long-term debt,
and MSRs. We also measure certain assets at fair value on a non-recurring basis either when such assets are carried at the LOCOM,
to evaluate assets for impairment, or for disclosure purposes. Examples of these non-recurring uses of fair value include certain
LHFS, OREO, goodwill, intangible assets, nonmarketable equity securities, certain partnership investments, and long-lived assets.
Depending on the nature of the asset or liability, we use various valuation techniques and assumptions when estimating fair value.
The objective of fair value is to use market-based inputs or assumptions, when available, to estimate the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Where observable market prices from transactions for identical assets or liabilities are not available, we identify what we
believe to be similar assets or liabilities. If observable market prices are unavailable or impracticable to obtain for any such similar
assets or liabilities, we look to other techniques by obtaining third party quotes or using modeling techniques, such as discounted
cash flows, while attempting to utilize market observable assumptions to the extent available. Absent current market activity in
that specific instrument or a similar instrument, the resulting valuation approach may require making a number of significant
judgments in the estimation of fair value. Market conditions during the credit crisis led to limited or nonexistent trading in certain
of the financial asset classes that we have owned. The lack of liquidity and low level of activity in these markets creates additional
challenges when estimating the fair value of related financial instruments.
Generally, the assets and liabilities most affected by the lack of liquidity are those required to be classified as level 3 in the fair
value hierarchy. As a result, various processes and controls have been adopted to determine that appropriate methodologies,
techniques and assumptions are used in the development of fair value estimates, particularly related to those instruments that
require the use of significant, unobservable inputs. We continue to maintain a cross-functional approach when estimating the fair
value of these difficult to value financial instruments. This includes input from not only the related line of business, but also from
risk management and finance, to ultimately arrive at a consensus estimate of the instrument's fair value after evaluating all available
information pertaining to fair value. This process has involved the gathering of multiple sources of information, including broker
quotes, values provided by pricing services, trading activity in other similar instruments, market indices, and pricing matrices
along with employing various modeling techniques, such as discounted cash flow analyses, in arriving at the best estimate of fair
value. Modeling techniques incorporate our assessments regarding assumptions that market participants would use in pricing the
asset or the liability, including market-based assumptions, such as interest rates, as well as assumptions about the risks inherent
in a particular valuation technique, the effect of a restriction on the sale or use of an asset, market liquidity, and the risk of
nonperformance. In certain cases, our assessments with respect to assumptions that market participants would make may be
inherently difficult to determine, and the use of different assumptions could result in material changes to these fair value
measurements. We used significant unobservable inputs to fair value, on a recurring basis, for certain trading assets, securities
AFS, portfolio loans accounted for at fair value, IRLCs, LHFS, MSRs and certain derivatives. Overall, the financial impact of the
level 3 financial instruments did not have a material impact on our liquidity or capital. Our exposure to level 3 financial instruments
continues to decline due to paydowns, sales and settlements of these instruments and minimal purchases. The following table
discloses assets and liabilities that have been impacted by level 3 fair value determinations.