SunTrust 2011 Annual Report Download - page 88
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analysis of goodwill as of September 30, 2011, we determined there is no goodwill impairment as the fair value for all reporting
units is in excess of the respective reporting unit's carrying value by the following percentages:
Branch Banking
Diversified Commercial Banking
CIB
W&IM
12%
27%
36%
150%
We monitored events and circumstances during the fourth quarter of 2011 and performed an interim impairment test for Branch
Banking. We found that its fair value had not changed since performing our annual test.
Valuation Techniques
In determining the fair value of our reporting units, we use discounted cash flow analyses, which require assumptions about short
and long-term net cash flow, growth rates for each reporting unit, as well as discount rates. Additionally, we consider guideline
company and guideline transaction information, where available, to aid in the valuation of certain reporting units.
Growth Assumptions
Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new
business initiatives, client service and retention standards, market share changes, anticipated loan and deposit growth, forward
interest rates, historical performance, and industry and economic trends, among other considerations. The long-term growth rate
used in determining the terminal value of each reporting unit was estimated at 4% as of September 30, 2011 and 2010 based on
management's assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic
considerations such as gross domestic product and inflation.
Discount Rate Assumptions
Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk
premium, beta, and unsystematic risk and size premium adjustments specific to a particular reporting unit. The discount rates are
also calibrated based on the assessment of the risks related to the projected cash flows of each reporting unit. In the annual analysis
as of September 30, 2011, the discount rates ranged from 13% to 17%.
Estimated Fair Value and Sensitivities
The estimated fair value of each reporting unit is derived from the valuation techniques described above. The estimated fair value
of each reporting unit is analyzed in relation to numerous market and historical factors, including current economic and market
conditions, company-specific growth opportunities, and guideline company and guideline transaction information.
Economic and market conditions can vary significantly which may cause increased volatility in a company's stock price, resulting
in a temporary decline in market capitalization. In those circumstances, current market capitalization may not be an accurate
indication of a market participant's estimate of entity-specific value measured over a reasonable period of time. We believe that
recent volatility may be tied to concerns related to a rating agency downgrade of the U.S. credit rating, market sentiment pertaining
to the overall banking sector and concerns regarding the global economy, rather than the result of company-specific adjustments
to cash flows, guideline multiples, or asset values which would have influenced the fair value of our reporting units. As a result,
the use of market capitalization is a less relevant measure to assess the reasonableness of the aggregate value of the reporting units.
Therefore, we supplement the market capitalization information with other observable market information that provided benchmark
valuation multiples from transactions over a reasonable period.
The estimated fair value of the reporting unit is highly sensitive to changes in these estimates and assumptions; therefore, in some
instances, changes in these assumptions could impact whether the fair value of a reporting unit is greater than its carrying value.
We perform sensitivity analyses around these assumptions in order to assess the reasonableness of the assumptions and the resulting
estimated fair values. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting
unit and cause the fair value of the reporting unit to be below its carrying value. Additionally, a reporting unit's carrying value of
equity could change based on market conditions and the risk profile of those reporting units.
If there is a situation where the carrying value of equity exceeds the estimated fair value, an additional goodwill impairment
evaluation is performed that involves calculating the implied fair value of the reporting unit's goodwill, which is determined in
the same manner as goodwill is recognized in a business combination.