Fifth Third Bank 2003 Annual Report Download - page 39

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
37
Initial carrying values of retained interests recognized during
2003 and 2002 were as follows:
($ in millions) 2003 2002
Mortgage Servicing Assets . . . . . $206 140
Other Consumer and
Commercial Servicing Assets . . $11 —
Consumer Residual Interests . . . $29 —
IO Strips. . . . . . . . . . . . . . . . . . $—3
Subordinated Interests. . . . . . . . $—22
Key economic assumptions used in measuring the retained
interests at the date of securitization resulting from securitizations
completed during 2003 and 2002 were as follows:
2003
Other Consumer Consumer
and Commercial Residual
Mortgage Servicing Asset Servicing Assets Interest
Fixed-Rate Adjustable Adjustable Adjustable
Prepayment speed. . . . 15.5% 31.9 40 40
Weighted-average life
(in years)
. . . . . . . 6.2 3.3 2.1 2.1
Residual servicing cash
flows discounted at. .
9.8% 10.7 12.0 11.7
Weighted-average
default rate . . . . . . . . —% — — .35
2002
Mortgage Servicing Asset Interest-Only Subordinated
Fixed-Rate Adjustable Strips Interest
Prepayment speed. . . .
22.7% 30.1 65 35
Weighted-average life
(in years)
. . . . . . . 4.6 3.1 .89 2.83
Residual servicing cash
flows discounted at. .
9.1% 11.0 — —
Weighted-average
default rate . . . . . . . . —% — — .9
Based on historical credit experience, expected credit losses and
the effect of an unfavorable change in credit losses for servicing
rights and IO strips have been deemed to not be material.
At December 31, 2003, 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:
Other Consumer Consumer
Mortgage and Commercial Residual Interest-
Servicing Asset Servicing Assets Interest Only Subordinated
(in millions) Fixed-Rate Adjustable Adjustable Adjustable Strips Interests
Fair value of
retained
interests
. . . . $267 29 11 32 1 55
Weighted-
average life
(in years)
. . . 4.8 2.6 2.4 2.0 1.7 1.6
Prepayment speed
assumption
(annual rate)
. 22% 45 40 40 42 46
Impact on fair value
of 10% adverse
change
. . . . . $ 14 2 1 3 — —
Impact on fair value
of 20% adverse
change
. . . . . $ 27 4 1 6 1 —
Residual servicing cash
flows discount rate
(annual)
. . . . 9.9% 11.2 12.0 11.7 — —
Impact on fair value
of 10% adverse
change
. . . . . $ 7 1 — 1 — —
Impact on fair value
of 20% adverse
change
. . . . . $ 13 1 — 1 — —
Weighted-average
default rate
. . —.% — — .35 — .9
Impact on fair value
of 10% adverse
change
. . . . . $ — — — 1 — 1
Impact on fair value
of 20% adverse
change . . . . . $ — — — 1 — 1
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a 10%
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 2003 and 2002, the Bancorp transferred, subject to credit
recourse, certain commercial loans to an unconsolidated QSPE that is
wholly owned by an independent third party. At December 31, 2003
and 2002, the outstanding balance of loans transferred was $1.8
billion. The commercial loans transferred to the QSPE are primarily
fixed-rate and short-term investment grade in nature. Generally, the
loans transferred, due to their investment grade nature, provide a lower
yield and therefore transferring these loans to the QSPE allows the
Bancorp to reduce its exposure to these lower yielding loan assets and
at the same time maintain these customer relationships. These
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, 2003, the $1.8 billion balance