Fifth Third Bank 2007 Annual Report Download - page 50

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp
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the repurchase activity can be found in Note 18 of the Notes to
Consolidated Financial Statements. On May 21, 2007, the
Bancorp announced that its Board of Directors had authorized
management to purchase 30 million shares of the Bancorp’s
common stock through the open market or in any private
transaction. The timing of the purchases and the exact number of
shares to be purchased depends upon market conditions. The
authorization does not include specific price targets or an
expiration date. At December 31, 2007, the Bancorp had
approximately 19 million shares remaining under the current
Board of Directors’ authorization.
Off-Balance Sheet Arrangements
The Bancorp consolidates all of its majority-owned subsidiaries
and variable interest entities for which the Bancorp is the primary
beneficiary. Other entities, including certain joint ventures in
which there is greater than 20% ownership, but upon which the
Bancorp does not possess and cannot exert significant influence
or control, are accounted for by equity method accounting and
not consolidated. Those entities in which there is less than 20%
ownership are generally carried at the lower of cost or fair value.
In the ordinary course of business, the Bancorp enters into
financial transactions to extend credit, and various forms of
commitments and guarantees that may be considered off-balance
sheet arrangements. These transactions involve varying elements
of market, credit and liquidity risk. The nature and extent of these
transactions are provided in Note 14 of the Notes to Consolidated
Financial Statements. In addition, the Bancorp uses conduits,
asset securitizations and certain defined guarantees to provide a
source of funding. The use of these investment vehicles involves
differing degrees of risk. A summary of these transactions is
provided below.
Through December 31, 2007 and 2006, the Bancorp had
transferred, subject to credit recourse, certain primarily floating-
rate, short-term, investment grade commercial loans to an
unconsolidated qualified special purpose entity (“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 theses loans to the QSPE allows
the Bancorp to reduce its exposure to these lower yielding loan
assets while maintaining the customer relationships. Under
current accounting provisions, QSPEs are exempt from
consolidation and, therefore, not included in the Bancorp’s
financial statements. The outstanding balance of such loans at
December 31, 2007 and 2006 was $3.0 billion and $3.4 billion,
respectively. As of December 31, 2007, the loans transferred had
a weighted average life of 2.3 years. These loans may be
transferred back to the Bancorp upon the occurrence of certain
specified events. 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. The maximum amount of credit risk in
the event of nonperformance by the underlying borrowers is
approximately equivalent to the total outstanding balance. In
2007 and 2006, the QSPE did not transfer any loans back to the
Bancorp as a result of a credit event. In addition, there have been
no material changes in the overall ratings of the loans transferred
to the QSPE. For the year ended December 31, 2007, the
Bancorp collected $1.1 billion in cash proceeds from loan
transfers and $30 million in fees from the QSPE. For the year
ended December 31, 2006, the Bancorp collected $1.6 billion in
cash proceeds from loan transfers and $30 million in fees from
the QSPE.
The QSPE issues commercial paper and uses the proceeds to
fund the acquisition of commercial loans transferred to it by the
Bancorp. The Bancorp also agrees to provide liquidity support to
the QSPE. As of December 31, 2007 and 2006, the liquidity
agreement was $5.0 billion and $3.8 billion, respectively. The
increase in liquidity facility during 2007 was due to the anticipated
increase in the volume of commercial loans transferred to the
QSPE. During the second half of 2007, the Bancorp purchased
asset-backed commercial paper from the QSPE and, as of
December 31, 2007, held $83 million of the QSPE’s asset-backed
commercial paper. The decision to purchase commercial paper
from the QSPE was due to widening credit spreads in the
commercial paper market and not due to a material difficulty in
obtaining funding. At December 31, 2007 and 2006, the
Bancorp’s loss reserve related to the liquidity support and credit
enhancement provided to the QSPE was $19 million and $16
million, respectively, and was recorded in other liabilities on the
Consolidated Balance Sheets.
The Bancorp utilizes securitization trusts formed by
independent third parties to facilitate the securitization process of
residential mortgage loans, certain floating-rate home equity lines
of credit, certain automobile loans and other consumer loans.
The cash flows to and from the securitization trusts are principally
limited to the initial proceeds from the securitization trust at the
time of sale, with subsequent cash flows relating to interests that
continue to held by the Bancorp. The Bancorp’s securitization
policy permits the retention of subordinated tranches, servicing
rights, interest-only strips, residual interests, limited credit
recourse and, in some cases, a cash reserve account. At
December 31, 2007, the Bancorp had retained servicing assets
totaling $618 million, subordinated tranche security interests
totaling $3 million and residual interests totaling $10 million. At
December 31, 2006, the Bancorp had retained servicing assets
totaling $524 million, subordinated tranche security interests
totaling $15 million and residual interests totaling $21 million. For
the years ended December 31, 2007 and 2006 cash proceeds from
transfers reinvested in revolving-period securities totaled $73
million and $97 million, respectively. Additionally, for the years
ended December 31, 2007 and 2006, the Bancorp received fees of
$2 million and $5 million, respectively, from securitization trusts.
At December 31, 2007 and 2006, the Bancorp had provided
credit recourse on approximately $1.5 billion and $1.3 billion,
respectively, of residential mortgage loans sold to unrelated third
parties. In the event of any customer default, pursuant to the
credit recourse provided, the Bancorp is required to reimburse the
third party. The maximum amount of credit risk in the event of
nonperformance by the underlying borrowers is equivalent to the
total outstanding balance. In the event of nonperformance, the
Bancorp has rights to the underlying collateral value attached to
the loan. The Bancorp maintained an estimated credit loss reserve
of approximately $17 million and $18 million relating to these
residential mortgage loans sold at December 31, 2007 and 2006,
respectively. To determine the credit loss reserve, the Bancorp
TABLE 41: SHARE REPURCHASES
For the years ended December 31 2007 2006 2005
Shares authorized for repurchase at January 1 15,807,045 17,846,953 35,685,112
Additional authorizations 30,000,000 - 20,000,000
Shares repurchases (a) (26,605,527) (2,039,908) (37,838,159)
Shares authorized for repurchase at December 31 19,201,518 15,807,045 17,846,953
Average price paid per share $40.70 39.72 43.19
(a) Excludes 365,867, 357,612 and 134,435 shares repurchased during 2007, 2006 and 2005, respectively, in connection with various employee compensation plans. These
repurchases are not included in the calculation for average price paid and do not count against the maximum number of shares that may yet be repurchased under the Board of
Directors’ authorization.