SunTrust 2015 Annual Report Download - page 74

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Nonperforming Loans
NPLs at December 31, 2015 totaled $672 million, a $38 million,
or 6% increase from December 31, 2014. Commercial NPLs
increased $146 million, or 84%, due largely to downgrades of
certain energy-related loans. While certain of these loans may
be current with respect to their contractual debt service
agreements, the recent decline in oil prices and projected
slowdown in global economic growth, combined with facts and
circumstances associated with these specific loan arrangements,
raised uncertainty regarding the full collectability of principal.
Therefore, we prudently stopped accruing interest on these loans
in the fourth quarter of 2015 and classified the loans as NPLs.
See the "Critical Accounting Policies" section of this Form 10-
K for additional information regarding our policy on loans
classified as nonaccrual. See the "Loans" section of this MD&A
for additional information regarding our energy-related loan
exposure. Residential NPLs declined $111 million, or 24%, due
largely to the sale of $122 million in nonperforming mortgages
during 2015.
Interest income on consumer and residential nonaccrual
loans, if recognized, is recognized on a cash basis. Interest
income on commercial nonaccrual loans is not generally
recognized until after the principal amount has been reduced to
zero. We recognized $22 million of interest income related to
nonaccrual loans during both 2015 and 2014. If all such loans
had been accruing interest according to their original contractual
terms, estimated interest income of $28 million and $47 million
would have been recognized in 2015 and 2014, respectively.
Other Nonperforming Assets
OREO decreased $43 million, or 43%, during 2015 compared
to 2014 as a result of net decreases of $36 million in residential
homes, $6 million in commercial properties, and $1 million in
residential construction related properties. Sales of OREO
resulted in proceeds of $120 million and $235 million during
2015 and 2014, respectively, contributing to net gains on sales
of OREO of $23 million and $42 million, respectively, inclusive
of valuation reserves.
Geographically, most of our OREO properties are located
in Florida, Georgia, and North Carolina. Residential and
commercial real estate properties comprised 70% and 20%,
respectively, of the $56 million in total OREO at December 31,
2015, with the remainder related to land and other properties.
Upon foreclosure, the values of these properties were reevaluated
and, if necessary, written down to their then-current estimated
value less estimated costs to sell. Any further decreases in
property values could result in additional losses as they are
periodically revalued. See the "Non-recurring Fair Value
Measurements" section within Note 18, "Fair Value Election and
Measurement," to the Consolidated Financial Statements in this
Form 10-K for additional information.
Gains and losses on the sale of OREO are recorded in other
noninterest expense in the Consolidated Statements of Income.
Sales of OREO and the related gains or losses are highly
dependent on our disposition strategy and buyer opportunities.
We are actively managing and disposing of these foreclosed
assets to minimize future losses.
Accruing loans past due 90 days or more included LHFI and
LHFS, and totaled $981 million and $1.1 billion, at December
31, 2015 and 2014, respectively. Of these, 96% and 97% were
government-guaranteed at December 31, 2015 and 2014,
respectively. Accruing LHFI past due 90 days or more decreased
$76 million, or 7%, during 2015, primarily driven by reductions
in government-guaranteed loans.
Restructured Loans
To maximize the collection of loan balances, we evaluate
troubled loans on a case-by-case basis to determine if a loan
modification is appropriate. We pursue loan modifications when
there is a reasonable chance that an appropriate modification
would allow our client to continue servicing the debt. For loans
secured by residential real estate, if the client demonstrates a loss
of income such that the client cannot reasonably support a
modified loan, we may pursue short sales and/or deed-in-lieu
arrangements. For loans secured by income producing
commercial properties, we perform an in-depth and ongoing
programmatic review. We review a number of factors, including
cash flows, loan structures, collateral values, and guarantees to
identify loans within our income producing commercial loan
portfolio that are most likely to experience distress.
Based on our review of the aforementioned factors, and our
assessment of overall risk, we evaluate the benefits of proactively
initiating discussions with our clients to improve a loan’s risk
profile. In some cases, we may renegotiate terms of their loans
so that they have a higher likelihood of continuing to perform.
To date, we have restructured loans in a variety of ways to help
our clients service their debt and to mitigate the potential for
additional losses. The primary restructuring methods being
offered to our residential clients are reductions in interest rates,
extensions of terms, or forgiveness of principal. For commercial
loans, the primary restructuring method is the extension of terms.
Loans with modifications deemed to be economic
concessions resulting from borrower financial difficulties are
reported as TDRs. Accruing loans may retain accruing status at
the time of restructure and the status is determined by, among
other things, the nature of the restructure, the borrower's
repayment history, and the borrower's repayment capacity.
Nonaccruing loans that are modified and demonstrate a
sustainable history of repayment performance in accordance
with their modified terms, typically six months, are usually
reclassified to accruing TDR status. Generally, once a residential
loan becomes a TDR, we expect that the loan will continue to
be reported as a TDR for its remaining life, even after returning
to accruing status (unless the modified rates and terms at the time
of modification were available in the market at the time of the
modification, or if the loan is subsequently remodified at market
rates). We note that some restructurings may not ultimately result
in the complete collection of principal and interest (as modified
by the terms of the restructuring), culminating in default, which
could result in additional incremental losses. These potential
incremental losses are factored into our ALLL estimate. The level
of re-defaults will likely be affected by future economic
conditions. See Note 6, "Loans," to the Consolidated Financial
Statements in this Form 10-K for more information.