SunTrust 2011 Annual Report Download - page 87
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Loans
The fair values of LHFI and LHFS 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.
Level 3 loans are predominantly mortgage loans that have been deemed not marketable, largely due to borrower defaults or the
identification of other loan defects. When estimating fair value for these loans, we use a discounted cash flow approach based on
assumptions that are generally not observable in the current markets, such as 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 upon sale of the loans.
Other Intangible Assets and Other Assets
Beginning January 1, 2010, we began recording all MSRs at fair value on a recurring basis. The fair value of MSRs is based on
discounted cash flow analyses and can be highly variable quarter to quarter as market conditions and projected interest rates
change. We provide disclosure of the key economic assumptions used to measure MSRs and residual interests and a sensitivity
analysis to adverse changes to these assumptions in Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial
Statements in this Form 10-K. This sensitivity analysis does not take into account hedging activities discussed in the “Other Market
Risk” section of this MD&A.
The fair values of OREO and other repossessed assets are typically determined based on recent appraisals by third parties and
other market information. Our OREO properties are concentrated in Georgia, Florida, and North Carolina. Further deterioration
in property values in those states or changes to our disposition strategies could cause our estimates of OREO values to decline
which would result in further write-downs. Estimates of fair value are also required when performing an impairment analysis of
goodwill, intangible assets and long-lived assets. For long-lived assets, including intangible assets subject to amortization, an
impairment loss is 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.
Other Liabilities
During the second quarter of 2009, in connection with our sale of Visa Class B shares, we entered into a derivative contract whereby
the ultimate cash payments received or paid, if any, under the contract are based on the ultimate resolution of litigation involving
Visa. The value of the derivative is estimated based on our expectations regarding the ultimate resolution of that litigation, which
involves a high degree of judgment and subjectivity. As a result, the value of the derivative liability was classified as a level 3
instrument. At December 31, 2011, the Visa derivative liability was valued at $22 million and was included within other liabilities
in the Consolidated Balance Sheets. See Note 18, “Reinsurance Arrangements and Guarantees,” to the Consolidated Financial
Statements in this Form 10-K for further discussion.
The fair value methodology and assumptions related to our IRLCs is described in Note 19, “Fair Value Election and Measurement,”
to the Consolidated Financial Statements in this Form 10-K.
Goodwill
As of December 31, 2011 and 2010, our reporting units with goodwill balances are Branch Banking, Diversified Commercial
Banking, CIB, and W&IM. Branch Banking is a component of the Retail Banking reportable segment. See Note 21, "Business
Segment Reporting," to the Consolidated Financial Statements in this Form 10-K for a further discussion of our reportable segments.
We review the goodwill of each reporting unit for impairment on an annual basis as of September 30th, or more often, if events or
circumstances indicate that it is more likely than not that the fair value of the reporting unit is below the carrying value of its
equity. The goodwill impairment analysis estimates the fair value of equity using discounted cash flow analyses which require
assumptions, as well as guideline company and guideline transaction information, where available. The inputs and assumptions
specific to each reporting unit are incorporated in the valuations, including projections of future cash flows, discount rates, the
fair value of tangible assets and intangible assets and liabilities, and applicable valuation multiples based on the guideline
information. We assess the reasonableness of the estimated fair value of the reporting units by giving consideration to our market
capitalization over a reasonable period of time; however, supplemental information is applied based on observable multiples from
guideline transactions, adjusted to reflect our specific factors, as well as current market conditions. Based on our annual impairment