Fifth Third Bank 2005 Annual Report Download - page 64

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp
62
6. INTANGIBLE ASSETS
Intangible assets consist of servicing rights, core deposits, customer
lists and non-compete agreements. Intangibles, excluding servicing
rights, are amortized on either a straight-line or an accelerated basis
over their estimated useful lives, generally over a period of up to 25
years. The Bancorp reviews core deposit and other intangible
assets for possible impairment whenever events or changes in
circumstances indicate that carrying amounts may not be
recoverable.
Detail of the Bancorp’s intangible assets as of December 31:
2005 2004
($ in millions)
Gross Carrying
Amount
Accumulated
Amortization (a)
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization (a)
Net Carrying
Amount
Mortgage servicing rights $1,075 (642) 433 940 (601) 339
Other consumer and
commercial servicing rights 22 (14) 8 22 (9) 13
Core deposits 432 (244) 188 347 (204) 143
Other intangible assets 29 (9) 20 9 (2) 7
Total $1,558 (909) 649 1,318 (816) 502
(a) Accumulated amortization for mortgage servicing rights includes a $46 million and $79 million valuation allowance at December 31, 2005 and 2004, respectively.
As of December 31, 2005, all of the Bancorp’s intangible
assets were being amortized. Amortization expense of $125
million, $130 million and $216 million, respectively, was recognized
on intangible assets (including servicing rights) for the years ended
December 31, 2005, 2004 and 2003, respectively. Estimated
amortization expense, including servicing rights, is $110 million in
2006, $93 million in 2007, $81 million in 2008, $69 million in 2009
and $59 million in 2010.
7. SERVICING RIGHTS
Changes in capitalized servicing rights for the years ended
December 31:
($ in millions) 2005 2004
Balance at January 1 $352 299
Amount capitalized 135 94
Amortization (79) (101)
Servicing valuation recovery 33 60
Balance at December 31 $441 352
Changes in the servicing rights valuation allowance for the years
ended December 31:
($ in millions) 2005 2004
Balance at January 1 $(79) (152)
Servicing valuation recovery 33 60
Permanent impairment write-off - 13
Balance at December 31 $(46) (79)
The Bancorp maintains a non-qualifying hedging strategy to
manage a portion of the risk associated with changes in value of
the MSR portfolio. This strategy includes the purchase of various
available-for-sale securities (primarily principal only strips) and
free-standing derivatives (principal only swaps, swaptions and
interest rate swaps). The interest income, mark-to-market
adjustments and gain or loss from sale activities associated with
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 volatility of longer-term interest rates during 2005 and
2004 and the resulting impact of changing prepayment speeds led
to the recovery of $33 million and $60 million, respectively, in
temporary impairment on the MSR portfolio. In addition, the
Bancorp recognized a net loss of $23 million and $10 million in
2005 and 2004, respectively, related to changes in fair value and
settlement of free-standing derivatives purchased to economically
hedge the MSR portfolio. As of December 31, 2005 and 2004,
other assets included free-standing derivative instruments related to
the MSR portfolio with a fair value of $4 million and $7 million,
respectively, and other liabilities included a fair value of $10 million
and $3 million, respectively. The outstanding notional amounts on
the free-standing derivative instruments related to the MSR
portfolio totaled $1.5 billion and $1.9 billion as of December 31,
2005 and 2004, respectively. As of December 31, 2005, the
available-for-sale securities portfolio included $197 million in
instruments related to the non-qualified hedging strategy.
During the second quarter of 2004, interest rate movement
expectations and corresponding increased prepayment speeds
resulted in the Bancorp determining a portion of the MSR
portfolio was permanently impaired, resulting in a write-off of $13
million in MSRs against the related valuation allowance.
Temporary changes in the MSR valuation allowance are captured
as a component of mortgage banking net revenue in the
Consolidated Statements of Income.
The estimated fair value of capitalized servicing rights was
$466 million and $353 million at December 31, 2005 and 2004,
respectively. The Bancorp serviced $25.7 billion and $23.0 billion
of residential mortgage loans and $.9 billion and $1.3 billion of
consumer loans for other investors at December 31, 2005 and
2004, respectively.