Fifth Third Bank 2003 Annual Report Download - page 30

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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As of December 31, 2003, all of the Bancorp’s intangible assets
were being amortized. Amortization expense of $216 million, $191
million, and $131 million respectively, was recognized on intangible
assets (including servicing rights) for the years ended December 31,
2003, 2002 and 2001, respectively.
Estimated amortization expense, including servicing rights, for
fiscal years 2004 through 2008 is as follows:
For the Years Ended December 31 ($ in millions)
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8. Servicing Rights
Changes in capitalized servicing rights for the years ended
December 31:
($ in millions) 2003 2002
Balance at January 1 . . . . . . . . . . . . . . . . . . . . $ 263 426
Amount capitalized. . . . . . . . . . . . . . . . . . . . . 217 140
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . (177) (157)
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (6)
Change in valuation reserve. . . . . . . . . . . . . . . (3) (140)
Balance at December 31 . . . . . . . . . . . . . . . . . $299 263
Changes in the servicing rights valuation reserve for the years
ended December 31:
($ in millions) 2003 2002 2001
Balance at January 1 . . . . . . . . . . $(278) (209) (10)
Servicing valuation provision. . . . (3) (140) (199)
Permanent impairment write-off . . 129 71 —
Balance at December 31 . . . . . . . $(152) (278) (209)
The Bancorp maintains a non-qualifying hedging strategy to
manage a portion of the risk associated with changes in impairment
on the mortgage servicing rights (MSR) portfolio. This strategy
includes the purchase of various securities (primarily FHLMC and
FNMA agency bonds, U.S. treasury bonds and principal only (PO)
strips) and the purchase of various free-standing derivatives (PO
swaps, swaptions, floors, forward contracts, options and interest rate
swaps). The interest income, mark-to-market adjustments and gain
or loss from sale activities in these portfolios are expected to
economically hedge a portion of the change in value of the MSR
portfolio caused by fluctuating discount rates, earnings rates and
prepayment speeds. The combined magnitude of decreasing interest
rates during the first six months of 2003 and subsequent increasing
interest rates in the last six months of 2003, led to the recognition of
a net $3 million in temporary impairment on the MSR portfolio in
2003. Significant decreases in primary and secondary mortgage
rates in 2002 led to an increase in prepayment speeds and
recognition of $140 million in temporary impairment. As
temporary impairment was recognized on the MSR portfolio in
2003 and 2002 due to falling primary and secondary mortgage rates
and earnings rates and corresponding increases in prepayment speeds,
the Bancorp sold certain of these securities resulting in net realized
gains of $3 million and $33 million in 2003 and 2002, respectively,
that were captured as a component of other operating income in the
Consolidated Statements of Income. In addition, the Bancorp
7. Intangible Assets and Goodwill
Intangible assets consist of core deposits, acquired merchant processing
portfolios and servicing rights. Intangibles, excluding servicing right
assets, are amortized on a straight-line basis over their estimated
useful lives, generally over a period of up to 25 years. The Bancorp
reviews intangible assets for possible impairment whenever events or
changes in circumstances indicate that carrying amounts may not
be recoverable.
Upon adoption of the amortization provisions of SFAS No. 142 on
January 1, 2002, the Bancorp discontinued the practice of amortizing
goodwill, which decreased operating expenses and increased net income
available to common shareholders as compared to 2001.
The following tables illustrate financial results on a pro forma
basis as if SFAS No. 142 were effective beginning January 1, 2001.
Results of operations for the year ended December 31:
($ in millions, except per share data) 2003 2002 2001
Income From Continuing Operations
Before Minority Interest
and Cumulative Effect. . . . . . . . .
$1,742 1,669 1,133
Net Income Available to
Common Shareholders . . . . . . . .
$1,754 1,634 1,127
Earnings Per Diluted Share . . . . . . . $ 3.03 2.76 1.92
The following table presents a reconciliation between originally
reported net income available to common shareholders for the year
ended December 31, 2001 and net income available to common
shareholders restated for the effects of SFAS No. 142:
($ in millions) 2001
Net Income Available to Common
Shareholders (as originally reported) . . . . . . .
$1,093
Effect of Goodwill Amortization
Expense, Net . . . . . . . . . . . . . . . . . . . . . . . . 34
Net Income Available to Common
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . $1,127
Detail of amortizable intangible assets as of December 31:
2003
Gross Carrying Accumulated Net
($ in millions) Amount Amortization (a) Carrying Amount
Mortgage Servicing Rights . . $ 870 581 289
Other Consumer and
Commercial Servicing
Rights . . . . . . . . . . . . . . . 11 1 10
Core Deposits . . . . . . . . . . .
341 181 160
Merchant Processing
Portfolios . . . . . . . . . . . . . 60 25 35
Total . . . . . . . . . . . . . . . . . . $1,282 788 494
2002
Gross Carrying Accumulated Net
($ in millions) Amount Amortization (a) Carrying Amount
Mortgage Servicing Rights . . $ 800 537 263
Core Deposits . . . . . . . . . . . 341 156 185
Merchant Processing and
Credit Card Portfolios . . . 66 15 51
Total . . . . . . . . . . . . . . . . . . $1,207 708 499
(a) Accumulated amortization for Mortgage Servicing Rights includes a $152 million
and $278 million valuation allowance at December 31, 2003 and December 31, 2002,
respectively.