SunTrust 2010 Annual Report Download - page 173

SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
At December 31, 2010, the total loss exposure ceded to the Company was approximately $547 million; however, the
maximum amount of loss exposure based on funds held in each separate trust account, including net premiums due to the
trust accounts, was limited to $158 million. Of this amount, $148 million of losses have been reserved for as of December 31,
2010, reducing the Company’s net remaining loss exposure to $10 million. The reinsurance reserve was $285 million as of
December 31, 2009. The decrease in the reserve balance was due to claim payments made to the primary mortgage insurance
companies during 2010. The Company’s evaluation of the required reserve amount includes an estimate of claims to be paid
by the trust in relation to loans in default and an assessment of the sufficiency of future revenues, including premiums and
investment income on funds held in the trusts, to cover future claims. Future reported losses may exceed $10 million, since
future premium income will increase the amount of funds held in the trust; however, future cash losses, net of premium
income, are not expected to exceed $10 million. The amount of future premium income is limited to the population of loans
currently outstanding since additional loans are not being added to the reinsurance contracts; future premium income could
be further curtailed to the extent the Company agrees to relinquish control of individual trusts to the mortgage insurance
companies. Premium income, which totaled $38 million, $48 million, and $59 million for each of the years ended
December 31, 2010, 2009 and 2008, respectively, is reported as part of noninterest income. The related provision for losses,
which totaled $27 million, $115 million, and $180 million for each of the years ended December 31, 2010, 2009, and 2008,
respectively, is reported as part of noninterest expense.
Guarantees
The Company has undertaken certain guarantee obligations in the ordinary course of business. The issuance of a guarantee
imposes an obligation for the Company to stand ready to perform, and should certain triggering events occur, it also imposes
an obligation to make future payments. Payments may be in the form of cash, financial instruments, other assets, shares of
stock, or provisions of the Company’s services. The following is a discussion of the guarantees that the Company has issued
as of December 31, 2010. In addition, the Company has entered into certain contracts that are similar to guarantees, but that
are accounted for as derivatives (see Note 17, “Derivative Financial Instruments,” to the Consolidated Financial Statements).
Visa
The Company issues and acquires credit and debit card transactions through Visa. The Company is a defendant, along
with Visa U.S.A. Inc. and MasterCard International (the “Card Associations”), as well as several other banks, in one of
several antitrust lawsuits challenging the practices of the Card Associations (the “Litigation”). The Company has entered
into judgment and loss sharing agreements with Visa and certain other banks in order to apportion financial
responsibilities arising from any potential adverse judgment or negotiated settlements related to the Litigation.
Additionally, in connection with Visa’s restructuring in 2007, a provision of the original Visa By-Laws, Section 2.05j,
was restated in Visa’s certificate of incorporation. Section 2.05j contains a general indemnification provision between a
Visa member and Visa, and explicitly provides that after the closing of the restructuring, each member’s indemnification
obligation is limited to losses arising from its own conduct and the specifically defined Litigation. The maximum
potential amount of future payments that the Company could be required to make under this indemnification provision
cannot be determined as there is no limitation provided under the By-Laws and the amount of exposure is dependent on
the outcome of the Litigation. As of December 31, 2010, Visa had funded $6.1 billion into an escrow account,
established for the purpose of funding judgments in, or settlements of, the Litigation. Agreements associated with Visa’s
IPO have provisions that Visa will first use the funds in the escrow account to pay for future settlements of, or judgments
in the Litigation. If the escrow account is insufficient to cover the Litigation losses, then Visa will issue additional
Class A shares (“loss shares”). The proceeds from the sale of the loss shares would then be deposited in the escrow
account. The issuance of the loss shares will cause a dilution of Visa’s Class B common stock as a result of an
adjustment to lower the conversion factor of the Class B common stock to Class A common stock. Visa USA’s members
are responsible for any portion of the settlement or loss on the Litigation after the escrow account is depleted and the
value of the Class B shares is fully-diluted.
In May 2009, the Company sold its 3.2 million shares of Class B Visa Inc. common stock to another financial institution
(“the Counterparty”) and entered into a derivative with the Counterparty. The Company received $112 million and
recognized a gain of $112 million in connection with these transactions. Under the derivative, the Counterparty will be
compensated by the Company for any decline in the conversion factor as a result of the outcome of the Litigation.
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