Fifth Third Bank 2004 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 57
The Bancorp sold fi xed and adjustable rate residential mortgage
loans in securitization transactions, during 2004 and 2003. The
Bancorp also securitized and sold certain automotive loans in 2004
and securitized and sold certain home equity lines of credit in 2003.
In all of those sales, the Bancorp retained servicing responsibilities.
In addition, the Bancorp retained a residual interest and an inter-
est only strip (“IO strip”) in the 2003 home equity lines of credit
securitization and a residual interest and a subordinated tranche
in the 2004 automotive loans securitization. The Bancorp receives
annual servicing fees at a percentage of the outstanding balance and
rights to future cash fl ows arising after the investors in the securi-
tization trusts have received the return for which they contracted.
The investors and the securitization trusts 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 fi nancial assets. In 2004 and 2003, the Bancorp recog-
nized pretax gains of $112 million and $340 million, respectively,
on the sales of residential mortgage loans, home equity lines of
credit and automotive loans. Total proceeds from residential mort-
gage loan, home equity lines of credit and automotive loan sales in
2004 and 2003 were $6.1 billion and $16.0 billion, respectively.
Initial carrying values of retained interests recognized during
2004 and 2003 were as follows:
($ in millions) 2004 2003
Mortgage servicing assets . . . . . . . . . . . . . . . . . . . . . $83 206
Other consumer and commercial servicing assets . . . 11 11
Consumer residual interests . . . . . . . . . . . . . . . . . . . 26 29
Subordinated interests . . . . . . . . . . . . . . . . . . . . . . . 21 —
The subordinated interests recognized in 2004 are securities
retained from the automotive loan securitization. These securities
are investment grade and are carried at their market value. Key
economic assumptions used in measuring other retained interests
at the date of securitization resulting from securitizations complet-
ed during 2004 and 2003 were as follows:
20. SALES AND TRANSFERS OF LOANS
These sensitivities are hypothetical and should be used with
caution. As the fi gures indicate, changes in fair value based on a
10% variation in assumptions typically 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 assump-
tion; 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.
In addition to the retained interests listed above, the Bancorp
retains certain investment grade securities from securitizations.
The fair value of these retained securities was $34 million and $56
million at December 31, 2004 and 2003, respectively. The securi-
ties are valued using quoted market prices.
The following table provides a summary of the total loans and
leases managed by the Bancorp, including loans securitized:
Expected credit losses and the effect of an unfavorable change in credit losses for servicing rights have been deemed to be immaterial based
on historical credit experience. At December 31, 2004, key economic assumptions and the sensitivity of the current fair value of residual cash
fl ows to immediate 10% and 20% adverse changes in those assumptions are as follows:
Prepayment Speed Assumption Residual Servicing Cash Flows Weighted-Average Default
Fair
Value
Weighted-
Average Life
(in years)
Impact of Adverse
Change on Fair Value Discount
Rate
Impact of Adverse
Change on Fair Value
Impact of Adverse
Change on Fair Value
($ in millions) Rate Rate 10% 20% 10% 20% Rate 10% 20%
Residential mortgage loans:
Servicing assets . . . . . Fixed $313 6.1 15.2% $16 $30 9.5% $9 $17 —% $— $—
Servicing assets . . . . . Adjustable 26 3.5 29.6 2 3 11.4 1 1 — — —
Home equity lines of credit:
Servicing assets . . . . . Adjustable 7 2.4 35.0 1 1 11.7 — — — — —
Residual interest . . . . Adjustable 29 2.1 35.0 2 4 11.7 1 1 .35 — 1
Automotive loans:
Servicing assets . . . . . Fixed 7 1.3 1.55 — 1 12.0 — — — — —
Residual interest . . . . Fixed 23 1.2 1.55 — — 12.0 — 1 1.25 1 1
2004 2003
Rate
Weighted-
Average Life
(in years)
Prepayment
Speed
Assumption
Discount
Rate
Weighted-
Average
Default Rate
Weighted-
Average Life
(in years)
Prepayment
Speed
Assumption
Discount
Rate
Weighted-
Average
Default Rate
Residential mortgage loans:
Servicing assets . . . . . Fixed 7.0 16.1% 9.5% N/A 6.2 15.5% 9.8% N/A
Servicing assets . . . . Adjustable 4.4 25.6 10.7 N/A 3.3 31.9 10.7 N/A
Home equity lines of credit:
Servicing assets . . . . . Adjustable 2.0 38.8 11.7 N/A 2.1 40 12.0 N/A
Residual interest . . . . Adjustable 2.0 38.8 11.7 .35% 2.1 40 11.7 .35%
Automotive loans:
Servicing assets . . . . . Fixed 2.9 1.55 12.0 N/A —— — —
Residual interest . . . . Fixed 2.9 1.55 12.0 1.25 —— — —