SunTrust 2013 Annual Report Download - page 207

Notes to Consolidated Financial Statements, continued
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from the estimated fair value of the underlying collateral, incorporating market data if available. At December 31, 2012, LHFI
also consisted primarily of residential real estate loans discharged in Chapter 7 bankruptcy that had not been reaffirmed by
the borrower and nonperforming CRE loans for which specific reserves have been recognized. A majority of these Chapter 7
bankruptcy loans were returned to accruing status during 2013 as a result of exhibiting at least six months of payment
performance following discharge by the bankruptcy court. There were no gains or losses during 2013 and 2012 as the charge-
offs related to these loans are a component of the ALLL. Due to the lack of market data for similar assets, all of these loans
are considered level 3.
OREO
OREO is measured at the lower of cost or its fair value less costs to sell. Level 2 OREO consists primarily of residential
homes, commercial properties, and vacant lots and land for which binding purchase agreements exist. Level 3 OREO consists
primarily of residential homes, commercial properties, and vacant lots and land for which initial valuations are based on
property-specific appraisals, broker pricing opinions, or other available market information. Due to the lower dollar value per
property and geographic dispersion of the portfolio, certain vacant lots and land properties (approximately 11% of level 3
OREO at December 31, 2013) are re-evaluated using a pooled approach, which applies geographic factors to adjust carrying
values for estimated further declines in value. Land and lots have proven to be the most challenging asset class to accurately
value due in part to the low balance per property composition of the asset class. The pooled discount methodology provides
a means to reserve for losses across a broad band of assets rather than rely on potentially unreliable asset-specific valuations.
The pooled discount methodology is applied to land and lot assets that have valuations older than six months. The Company's
independent internal valuation group determines the discounts to be applied and the discount percentages are segregated by
state and by asset class (residential or commercial). The range of discount percentages applied to residential properties was
10% to 60% with a weighted average of 29%. The range of discount percentages applied to commercial properties was 5%
to 45% with a weighted average of 24%. The discount percentages reflect the general market decline/increase in a particular
state for a particular asset class and are determined by examining various valuation sources, including but not limited to, recent
appraisals or sales prices of similar assets within each state.
Affordable Housing
The Company evaluates its consolidated affordable housing properties for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An impairment is recognized if the carrying amount
of the property exceeds its fair value. Fair value measurements for affordable housing properties are derived from internal
analyses using market assumptions if available. Significant assumptions utilized in these analyses include cash flows, market
capitalization rates, and tax credit market pricing. Due to the lack of comparable sales in the marketplace, these valuations
are considered level 3. During 2012, the Company decided to actively market for sale certain consolidated affordable housing
properties, and accordingly, recorded an impairment charge of $96 million to adjust the carrying values of these properties to
their estimated net realizable values obtained from a third party broker opinion. The majority of the properties held for sale
were sold in 2013. During 2013, the Company recognized losses of $3 million on affordable housing properties not held for
sale.
Other Assets
Other assets consist of private equity and other equity method investments, other repossessed assets, assets under operating
leases where the Company is the lessor, and land held for sale.
Investments in private equity partnerships and other equity method investments are valued based on the expected remaining
cash flows to be received from these assets discounted at a market rate that is commensurate with the expected risk. Based
on the valuation methodology and the lack of observable inputs, these investments are considered level 3. During 2013, the
Company recognized impairment charges on its equity investments of $11 million. The Company did not recognize impairment
charges on its equity investments during 2012.
Other repossessed assets consist of repossessed personal property that is measured at fair value less cost to sell. These assets
are considered level 2 as their fair value is determined based on market comparables and broker opinions. During 2013 and
2012, the Company recognized impairment charges of $19 million and $2 million on other repossessed assets, respectively.
The Company monitors the fair value of assets under operating leases where the Company is the lessor and recognizes
impairment to the extent the carrying value is not recoverable and the fair value is less than its carrying value. Fair value is
determined using collateral specific pricing digests, external appraisals, broker opinions, and recent sales data from industry
equipment dealers as well as the discounted cash flows derived from the underlying lease agreement. As market data for
similar assets and lease arrangements is available and used in the valuation, these assets are considered level 2. During 2013
and 2012, the Company recognized impairment charges of $31 million and $2 million, respectively, attributable to the fair
value of various personal property under operating leases.