SunTrust 2010 Annual Report Download - page 141

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
servicing assets capitalized by the Company. Previously, the Company maintained two classes of MSRs: MSRs related to loans
originated and sold after January 1, 2008, which were reported at fair value, and MSRs related to loans sold before January 1,
2008, which were reported at LOCOM. Beginning January 1, 2010, the Company elected to account for all MSRs at fair value.
See Note 9, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements for the rollforward of MSRs. As
of December 31, 2009, the Company had established an MSR valuation allowance of $7 million. No permanent impairment
losses were recorded against the allowance for MSRs carried at amortized cost during the year ended December 31, 2009.
Income earned by the Company on its MSRs is derived primarily from contractually specified mortgage servicing fees and
late fees, net of curtailment costs. Such income earned for the years ended December 31, 2010, 2009 and 2008 was $399
million, $354 million, and $354 million, respectively. These amounts are reported in mortgage servicing-related income in
the Consolidated Statements of Income/(Loss).
As of December 31, 2010, 2009, and 2008 the total unpaid principal balance of mortgage loans serviced was $167.2 billion,
$178.9 billion, and $162.0 billion, respectively. Included in these amounts were $134.1 billion, $146.7 billion, and $130.5
billion as of December 31, 2010, 2009, and 2008, respectively, of loans serviced for third parties. During the year ended
December 31, 2010, the Company sold MSRs on residential loans with an unpaid principal balance of $7.0 billion. Because
MSRs are reported at fair value, the sale did not have a material impact on mortgage servicing related income/(loss).
A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the Company’s
MSRs as of December 31, 2010 and 2009, and the sensitivity of the fair values to immediate 10% and 20% adverse changes
in those assumptions are as follows:
December 31, 2010 December 31, 2009
(Dollars in millions) Fair Value Fair Value LOCOM
Fair value of retained MSRs $1,439 $936 $749
Prepayment rate assumption (annual) 12 % 10 % 17 %
Decline in fair value from 10% adverse change $50 $30 $30
Decline in fair value from 20% adverse change 95 58 58
Discount rate (annual) 12 % 10 % 12 %
Decline in fair value from 10% adverse change $68 $39 $27
Decline in fair value from 20% adverse change 130 75 51
Weighted-average life (in years) 6.2 7.5 4.8
Weighted-average coupon 5.4 % 5.2 % 6.1 %
The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value
based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to
the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities. In addition, the sensitivities above do not include
the effect of hedging activity undertaken by the Company to offset changes in the fair value of MSRs. See Note 17,
“Derivative Financial Instruments,” for further information regarding these hedging transactions.
Other Variable Interest Entities
In addition to the Company’s involvement with certain VIEs, which is discussed herein under “Certain Transfers of Financial
Assets and related Variable Interest Entities”, the Company also has involvement with VIEs from other business activities.
Three Pillars Funding, LLC
SunTrust assists in providing liquidity to select corporate clients by directing them to a multi-seller CP conduit, Three
Pillars. Three Pillars provides financing for direct purchases of financial assets originated and serviced by SunTrust’s
corporate clients by issuing CP.
The Company has determined that Three Pillars is a VIE as Three Pillars has not issued sufficient equity at risk.
Previously, Three Pillars had issued a subordinated note to a third party, which would have absorbed the first dollar of
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