SunTrust 2011 Annual Report Download - page 150
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Please find page 150 of the 2011 SunTrust annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Notes to Consolidated Financial Statements (Continued)
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were $2.0 billion and $1.9 billion, respectively, at December 31, 2011, and $2.1 billion and $2.0 billion, respectively, at
December 31, 2010. The Company is not obligated to provide any support to these entities, nor has it previously provided
support to these entities. No events occurred during the year ended December 31, 2011 that would change the Company’s
previous conclusion that it is not the primary beneficiary of any of these securitization entities.
Student Loans
In 2006, the Company completed a securitization of government-guaranteed student loans through a transfer of loans to
a securitization SPE, which previously qualified as a QSPE, and retained the related residual interest in the SPE. The
Company, as master servicer of the loans in the SPE, has agreed to service each loan consistent with the guidelines
determined by the applicable government agencies in order to maintain the government guarantee. The Company and
the SPE have entered into an agreement to have the loans subserviced by an unrelated third party.
The Company concluded that this securitization of government-guaranteed student loans (the “Student Loan entity”)
should be consolidated as it has both power over the entity through its role as master servicer and the obligation to absorb
losses or the right to receive benefits through the retention of the residual interest. Accordingly, the Company consolidated
the Student Loan entity at its unpaid principal amount as of September 30, 2010, resulting in incremental total assets and
total liabilities of approximately $490 million and an immaterial impact on shareholders’ equity. The consolidation of
the Student Loan entity had no impact on the Company’s earnings or cash flows that results from its involvement with
this VIE. The primary balance sheet impacts from consolidating the Student Loan entity were increases in LHFI, the
related ALLL, and long-term debt. Additionally, the Company’s ownership of the residual interest in the SPE, previously
classified in trading assets, was eliminated upon consolidation and the assets and liabilities of the Student Loan entity
are recorded on a cost basis. At December 31, 2011 and 2010, the Company’s Consolidated Balance Sheets reflected
$438 million and $479 million, respectively, of assets held by the Student Loan entity and $433 million and $474 million,
respectively, of debt issued by the Student Loan entity.
Payments from the assets in the SPE must first be used to settle the obligations of the SPE, with any remaining payments
remitted to the Company as the owner of the residual interest. To the extent that losses occur on the SPE’s assets, the
SPE has recourse to the federal government as the guarantor up to a maximum guarantee amount of 97%. Losses in
excess of the government guarantee reduce the amount of available cash payable to the Company as the owner of the
residual interest. To the extent that losses result from a breach of the master servicer’s servicing responsibilities, the SPE
has recourse to the Company; the SPE may require the Company to repurchase the loan from the SPE at par value. If the
breach was caused by the subservicer, the Company has recourse to seek reimbursement from the subservicer up to the
guaranteed amount. The Company’s maximum exposure to loss related to the SPE is represented by the potential losses
resulting from a breach of servicing responsibilities. To date, all loss claims filed with the guarantor that have been denied
due to servicing errors have either been cured or reimbursement has been provided to the Company by the subservicer.
The Company is not obligated to provide any noncontractual support to this entity, and it has not provided any such
support.
CDO Securities
The Company has transferred bank trust preferred securities in securitization transactions. The majority of these transfers
occurred between 2002 and 2005 with one transaction completed in 2007. The Company retained equity interests in
certain of these entities and also holds certain senior interests that were acquired during 2008 and 2011 in conjunction
with its acquisition of assets from the ARS transactions discussed in Note 20, “Contingencies.” The Company is not
obligated to provide any support to these entities and its maximum exposure to loss at December 31, 2011 and 2010
includes current senior interests held in trading securities, which had a fair value of $43 million as of December 31, 2011
and $29 million as of December 31, 2010.
The assumptions and inputs considered by the Company in valuing this retained interest include prepayment speeds,
credit losses, and the discount rate. While all the underlying collateral is currently eligible for repayment by the obligor,
given the nature of the collateral and the current repricing environment, the Company assumed no prepayment would
occur before the final maturity, which is approximately 22 years on a weighted average basis. Due to the seniority of the
interests in the structure, current estimates of credit losses in the underlying collateral could withstand a 20% adverse
change in the default assumption without the securities incurring a valuation loss assuming all other assumptions remain
constant. Therefore, the key assumption in valuing these securities was the assumed discount rate, which was estimated
to range from 8% to 12% over LIBOR at December 31, 2011 compared to 14% to 16% over LIBOR at December 31,
2010. This significant change in the discount rate was supported by a return to liquidity in the market for similar interests.
At December 31, 2011 and 2010, a 20% adverse change in the assumed discount rate results in declines of approximately
$8 million and $5 million, respectively, in the fair value of these securities. Although the impact of each assumption
change in isolation is minimal, the underlying collateral of the VIEs is highly concentrated and as a result, the default or