Fifth Third Bank 2008 Annual Report Download - page 75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 73
from the QSPE. As of December 31, 2008 and 2007, the liquidity
asset purchase agreement was $2.8 billion and $5.0 billion,
respectively. During 2008, dislocation in the short-term funding
market caused the QSPE difficulty in obtaining sufficient funding
through the issuance of commercial paper. As a result, the
Bancorp provided liquidity support to the QSPE during 2008
through purchases of commercial paper, a line of credit to the
QSPE, and the repurchase of assets from the QSPE under the
liquidity asset purchase agreement. As of December 31, 2008, the
Bancorp held approximately $143 million of asset-backed
commercial paper issued by the QSPE, representing 7% of the
total commercial paper issued by the QSPE.
During 2008, the Bancorp repurchased $686 million of
commercial loans at par from the QSPE under the liquidity asset
purchase agreement. Fair value adjustment charges of $3 million
were recorded on these loans upon repurchase. As of December
31, 2008, there were no outstanding balances on the line of credit
from the Bancorp to the QSPE.
Servicing Assets and Residual Interests
Refer to Note 1 for the accounting policies for measuring interests
in transferred financial assets that continue to be held by the
Bancorp. The key economic assumptions used in measuring the
initial carrying values of the mortgage servicing assets and
automobile residual interests that continue to be held by the
Bancorp were as follows:
2008 2007
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 5.9 19.2% 9.7% N/A 6.4 12.9% 9.6% N/A
Servicing assets Adjustable 2.7 30.8 14.5 N/A 3.4 29.4 12.9 N/A
Automobile loans:
Residual interests Fixed 1.8 22.9 8.0 1.5% N/A N/A N/A N/A
Based on historical credit experience, expected credit losses for
residential mortgage loan servicing assets have been deemed
immaterial, as the Bancorp sold the majority of the underlying
loans without recourse. At December 31, 2008 and 2007, the
Bancorp serviced $40.4 billion and $34.5 billion of residential
mortgage loans for other investors.
The value of interests that continue to be held by the
Bancorp is subject to credit, prepayment and interest rate risks on
the sold financial assets. At December 31, 2008, the sensitivity of
a decline in the current fair value of residual cash flows to
immediate 10% and 20% adverse changes in those assumptions
are as follows:
Prepayment Speed
Assumption
Residual Servicing
Cash Flows
Weighted-Average
Default
Fair
Impact of Adverse
Change on Fair
Value Discount
Impact of Adverse
Change on Fair
Value
Impact of Adverse
Change on Fair
Value
($ in millions) Rate Value
Weighted-
Average
Life (in
years) Rate 10% 20% Rate 10% 20% Rate 10% 20%
Residential mortgage loans:
Servicing assets Fixed $458 4.1 19.2% $30 $58 10.0 % $14 $27 - % $- $-
Servicing assets Adjustable 38 2.8 31.9 3 5 15.0 1 3 - - -
Automobile loans:
Residual interest Fixed 124 2.0 25.0 3 5 11.4 3 6 1.8 3 6
These sensitivities are hypothetical and should be used with
caution, as changes in fair value based on a 10% variation in
assumptions typically cannot be extrapolated because the
relationship of the change in assumption to the change in fair
value may not be linear. Also, in the previous table, the effect of a
variation in a particular assumption on the fair value of the
interests that continue to be held by the transferor is calculated
without changing any other assumption; in reality, changes in one
factor may result in changes in another. For example, increases in
market interest rates may result in lower prepayments and
increased credit losses, which might magnify or counteract the
sensitivities. The following table reflects changes in the servicing
asset related to residential mortgage loans for the years ended
December 31:
($ in millions) 2008 2007
Carrying amount as of the beginning of period $662 546
Servicing obligations that result from transfer of residential mortgage loans 196 207
Acquisitions 1-
Amortization (107) (91)
Carrying amount before valuation allowance $752 662
Valuation allowance for servicing assets:
Beginning balance ($49) (27)
Servicing valuation impairment (207) (22)
Ending balance (256) (49)
Carrying amount as of the end of the period $496 613
Temporary impairment or impairment recovery, effected through
a change in the MSR valuation allowance, is 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.
During 2008, the Bancorp recognized a net gain of $120
million, classified as securities gains in noninterest income, related