SunTrust 2014 Annual Report Download - page 74

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a regulatory capital event, at a redemption price of $1,000 per
depositary share plus any declared and unpaid dividends. Except
in certain limited circumstances, the Series F Preferred Stock
does not have any voting rights.
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, and valuing an asset or 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 and applied
consistently from period to period, and that 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 LHFI 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, risk-rating, or
other indicative 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 is
sensitive to the assigned internal risk ratings and inherent loss
rates at December 31, 2014. Assuming a downgrade of one level
in the PD risk ratings for all commercial loans and leases, the
ALLL would have increased by approximately $349 million at
December 31, 2014. 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 $97 million at December 31, 2014. 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 $65 million at December 31, 2014.
Because several quantitative and qualitative factors are
considered in determining the ALLL, these sensitivity analyses
do not necessarily reflect the nature and extent of future changes
in the ALLL. They are intended to provide insights into the
impact of adverse changes in risk rating and estimated loss
severity rates and do not imply any expectation of future
deterioration in the risk ratings or loss rates. Given current
processes employed, management believes the risk ratings and
inherent loss rates currently assigned are appropriate. It is
possible that others, given the same information, may at any point
in time reach different reasonable conclusions that could be
material to our financial statements.
In addition to the ALLL, we also estimate probable losses
related to unfunded lending commitments, such as letters of
credit and binding unfunded loan commitments. Unfunded
lending commitments are analyzed and segregated by risk