Fifth Third Bank 2007 Annual Report Download - page 68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp
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The following table reflects changes in the servicing asset related to residential mortgage loans for the years ended December 31:
($ in millions) 2007 2006
Carrying amount as of the beginning of period $546 479
Servicing obligations that result from transfer of residential mortgage loans 207 135
Amortization (91) (68)
Carrying amount before valuation allowance $662 546
Valuation allowance for servicing assets:
Beginning balance (27) (46)
Servicing valuation impairment recovery (22) 19
Ending balance (49) (27)
Carrying amount as of the end of the period $613 519
Temporary impairment or impairment recovery, effected
through a change in the MSR valuation allowance, are reported as
a component of mortgage banking net revenue in the
Consolidated Statements of Income. 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 free-standing derivatives
(principal-only swaps, swaptions and interest rate swaps) and
various available-for-sale securities (primarily principal-only
strips). The interest income, mark-to-market adjustments and
gain or loss on sales 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 Bancorp recognized a net gain of $29 million during
2007 and a net loss of $6 million during 2006 related to changes in
fair value and settlement of free-standing derivatives purchased to
economically hedge the MSR portfolio. As of December 31, 2007
and 2006, other assets included free-standing derivative
instruments related to the MSR portfolio with a fair value of $70
million and $14 million, respectively, and other liabilities included
free-standing derivative instruments with a fair value of $16
million and $5 million, respectively. The outstanding notional
amounts on the free-standing derivative instruments related to the
MSR portfolio totaled $4.3 billion and $2.9 billion as of December
31, 2007 and 2006, respectively. For the years ended December
31, 2007 and 2006, the Bancorp recognized a gain of $6 million
and $3 million, respectively, related to the sale of securities used to
economically hedge MSRs. As of December 31, 2007 and 2006,
the available-for-sale securities portfolio included $205 million and
$176 million, respectively, of securities related to the non-
qualifying hedging strategy.
The fair value of the servicing asset is based on the present
value of expected future cash flows. The following table displays
the beginning and ending fair value for the years ended December
31, 2007 and 2006:
($ in millions) 2007 2006
Fixed rate residential mortgage loans:
Fair value at beginning of period
$483 413
Fair value at end of period
565 483
Adjustable rate residential mortgage loans:
Fair value at beginning of period
45 45
Fair value at end of period
50 45
During 2007 and 2006, 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. The Bancorp
obtains servicing responsibilities and receives monthly servicing
fees. As of December 31, 2007 and 2006, the Bancorp had $3.0
billion and $3.4 billion, respectively, of outstanding loans with a
weighted-average remaining maturity of 2.3 years and 2.7 years,
respectively. These loans may be transferred back to the Bancorp
upon the occurrence of certain 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. These commercial loans
are transferred at par with no gain or loss recognized. 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 $30
million in fees from the QSPE.
The following table provides a summary of the total loans and
leases managed by the Bancorp, including loans securitized and
loans in the unconsolidated QSPE for the years ended December
31:
Balance
Balance of Loans 90 Days or
More Past Due
Net Credit
Losses
($ in millions) 2007 2006 2007 2006 2007 2006
Commercial loans $29,052 24,217 43 38 109 107
Commercial mortgage 11,967 10,405 73 17 44 24
Commercial construction loans 5,561 6,168 67 6 29 8
Commercial leases 3,737 3,841 52 -(1)
Residential mortgage loans 11,454 9,942 187 69 43 22
Home equity loans 12,162 12,527 74 56 99 58
Automobile loans 11,183 10,174 13 8 86 58
Other consumer loans and leases 2,749 2,171 32 17 54 43
Total loans and leases managed and securitized (a) $87,865 79,445 494 213 464 319
Less:
Loans securitized $310 556
Loans in unconsolidated QSPE 2,973 3,386
Loans held for sale 4,329 1,150
Total portfolio loans and leases $80,253 74,353
(a) Excluding securitized assets that the Bancorp continues to service but with which it has no other continuing involvement.