Fifth Third Bank 2006 Annual Report Download - page 77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 75
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 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 previous 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.
In addition to the retained interests listed previously, the
Bancorp retains certain investment grade securities from
securitizations. The fair value of these retained securities was $15
million and $30 million at December 31, 2006 and 2005,
respectively. The securities are valued using quoted market prices.
The following table provides a summary of the total loans and
leases managed by the Bancorp, including loans securitized for the
years ended December 31:
Balance
Balance of Loans 90 Days or
More Past Due
Net Credit
Losses
($ in millions) 2006 2005 2006 2005 2006 2005
Commercial loans $20,725 19,299 $38 20 $107 75
Commercial mortgage 10,405 9,188 17 8 24 9
Commercial leases 3,841 3,698 2 1 (1) 37
Construction loans 6,847 7,037 18 11 84
Residential mortgage 9,263 8,353 57 49 22 19
Other consumer loans 23,905 22,987 79 65 154 147
Consumer leases 1,073 1,595 2 3 514
Total loans and leases managed and securitized (a) 76,059 72,157 $213 157 $319 305
Less:
Loans securitized 556 928
Loans held for sale 1,150 1,304
Total portfolio loans and leases $74,353 69,925
(a) Excluding securitized assets that the Bancorp continues to service but with which it has no other continuing involvement.
Static pool credit losses are calculated by aggregating the
actual and projected future credit losses for a securitization and
dividing these losses by the original balance in each pool of assets.
For the home equity lines of credit securitized in 2003, the static
pool credit losses were .80% and .70% as of December 31, 2006
and 2005, respectively. For the automotive loans securitized in
2004, the static pool credit losses were 1.09% and 1.00% as of
December 31, 2006 and 2005, respectively.
During 2006 and 2005, the Bancorp transferred, subject to
credit recourse, certain primarily floating-rate, short-term,
investment grade commercial loans to an unconsolidated QSPE
that is wholly owned by an independent third-party. Generally, the
loans transferred provide a lower yield due to their investment
grade nature, and therefore transferring these loans to the QSPE
allows the Bancorp to reduce its exposure to these lower yielding
loan assets while maintaining the customer relationships. The
Bancorp retains servicing and receives monthly servicing fees. At
December 31, 2006 and 2005, the outstanding balance of loans
transferred was $3.4 billion and $2.8 billion, respectively. These
loans may be transferred back to the Bancorp upon the occurrence
of an event specified in the legal documents that established the
QSPE. These events include borrower default on the loans
transferred, bankruptcy preferences initiated against underlying
borrowers and ineligible loans transferred by the Bancorp to the
QSPE. 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. No value has been
assigned to this retained future stream of fees to be received as the
fair value of this right was deemed immaterial due to the short-
term servicing period of the assets transferred and the small spread
provided by the transferred loans. As of December 31, 2006, the
$3.4 billion balance of outstanding loans had a weighted-average
remaining maturity of 2.7 years.
During 2004, the Bancorp securitized and sold $750 million in
automotive loans to an unconsolidated QSPE that is wholly owned
by an independent third party. The Bancorp retained servicing
rights and receives a servicing fee based on a percentage of the
outstanding balance. Additionally, the Bancorp retained a
subordinated tranche of securities and rights to future cash flows
arising after 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
interest is subordinate to investor’s interests and its value is subject
to credit, prepayment and interest rate risks on the sold automotive
loans. As of December 31, 2006, the remaining balance of sold
automotive loans was $146 million.
During 2003, the Bancorp securitized and sold $903 million in
home equity lines of credit to an unconsolidated QSPE that is
wholly owned by an independent third party. The Bancorp
retained servicing rights and receives a servicing fee based on a
percentage of the outstanding balance. Additionally, the Bancorp
retained rights to future cash flows arising after 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 interest is subordinate to
investor’s interests and its value is subject to credit, prepayment
and interest rate risks on the sold home equity lines of credit.
During 2006, pursuant to the terms of the sales and servicing
agreement, $39 million in fixed-rate home equity line of credit
balances were put back to the Bancorp. As of December 31, 2006,
the remaining balance of sold home equity lines of credit was $374
million.
The Bancorp had the following cash flows with
unconsolidated QSPEs during 2006 and 2005:
($ in millions) 2006 2005
Proceeds from transfers, including new securitizations $1,618 1,680
Proceeds from collections reinvested in revolving-period securitizations 97 132
Fees received 35 32