Fifth Third Bank 2001 Annual Report Download - page 32

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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19. Sales and Transfers of Loans
During 2001 and 2000, the Bancorp sold fixed rate and adjustable
residential mortgage loans in securitization transactions. In all
those sales, the Bancorp retained servicing responsibilities. The
Bancorp receives annual servicing fees at a percentage of the
outstanding balance and rights to future cash flows arising after
the investors in the securitization trust have received the return for
which they contracted. The investors and the securitization trust
have no recourse to the Bancorp’s other assets for failure of
debtors to pay when due. The Bancorp’s retained interests are
subordinate to investor’s interests. Their value is subject to credit,
prepayment and interest rate risks on the sold financial assets. In
2001 and 2000, the Bancorp recognized pretax gains of $197.1
million and $160.7 million, respectively, on the sales of residential
mortgage loans. Total proceeds from residential mortgage loan
sales in 2001 and 2000 were $9.0 billion and $12.4 billion,
respectively.
Key economic assumptions used in measuring the retained
interests at the date of securitization resulting from securitizations
completed during 2001 and 2000 were as follows:
2001
Residential Mortgage Loans
Fixed-Rate Adjustable
Prepayment speed . . . . . . . . . . . . . . . . . 13.9% 23.1%
Weighted-average life (in years) . . . . . . . 7.2 4.0
Residual servicing cash flows
discounted at . . . . . . . . . . . . . . . . . . . 10.5% 15.2%
2000
Residential Mortgage Loans
Fixed-Rate Adjustable
Prepayment speed . . . . . . . . . . . . . . . . . 23.5% 24.6%
Weighted-average life (in years) . . . . . . . 4.6 4.1
Residual servicing cash flows
discounted at . . . . . . . . . . . . . . . . . . . 10.4% 11.4%
Based on historical credit experience, expected credit losses and
the effect of an unfavorable change in credit losses have been
deemed to not be material.
At December 31, 2001 and 2000, key economic assumptions
and the sensitivity of the current fair value of residual cash flows to
immediate 10 percent and 20 percent adverse changes in those
assumptions are as follows:
2001
Residential Mortgage Loans
($ in millions) Fixed-Rate Adjustable
Fair value of retained servicing interests. . . $211.1 $ 7.9
Weighted-average life (in years) . . . . . . . 7.2 4.0
Prepayment speed assumption
(annual rate) . . . . . . . . . . . . . . . . . . . 13.9% 23.1%
Impact on fair value of 10% adverse change $ 9.9 $ .5
Impact on fair value of 20% adverse change $ 18.1 $ .9
Residual cash flows discount rate
(annual). . . . . . . . . . . . . . . . . . . . . . . 10.5% 15.2%
Impact on fair value of 10% adverse change $ 7.2 $ .2
Impact on fair value of 20% adverse change $ 13.9 $ .4
2000
Residential Mortgage Loans
($ in millions) Fixed-Rate Adjustable
Fair value of retained servicing interests. . . $96.1 $24.2
Weighted-average life (in years) . . . . . . . 4.6 4.1
Prepayment speed assumption
(annual rate) . . . . . . . . . . . . . . . . . . . 23.5% 24.6%
Impact on fair value of 10% adverse change $ 5.6 $ 1.4
Impact on fair value of 20% adverse change $10.2 $ 2.4
Residual cash flows discount rate
(annual). . . . . . . . . . . . . . . . . . . . . . . 10.4% 11.4%
Impact on fair value of 10% adverse change $ 2.7 $ .7
Impact on fair value of 20% adverse change $ 5.0 $ 1.4
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a 10
percent variation 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 the above 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 (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might
magnify or counteract the sensitivities.
During 2001 and 2000, the Bancorp transferred, subject to
recourse, certain commercial loans to an unconsolidated QSPE that is
wholly owned by an independent third party. At December 31, 2001
and 2000, the outstanding balance of loans transferred was $2.0
billion and $1.9 billion, respectively. The commercial loans
transferred to the QSPE are primarily fixed-rate and short-term
investment grade in nature. The commercial loans are transferred at
par with no gain or loss recognized. The Bancorp receives rights to
future cash flows arising after the investors in the securitization trust
have received the return for which they contracted. Due to the
relatively short-term nature of the loans transferred, no value has been
assigned to this retained future stream of fees to be received. As of
December 31, 2001, the $2.0 billion balance of outstanding loans
had a weighted average remaining maturity of 19 days.
The Bancorp had the following cash flows with the
unconsolidated QSPE during 2001 and 2000:
($ in millions) 2001 2000
Proceeds from transfers. . . . . . . . . . . $203.0 678.8
Transfers received from QSPE . . . . . $178.5 —
Fees received . . . . . . . . . . . . . . . . . . $ 22.6 12.6