Fifth Third Bank 2008 Annual Report Download - page 81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 79
12. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions) 2008 2007
Derivative instruments $3,225 $939
Bank owned life insurance 1,777 1,832
Accounts receivable and drafts-in-process 1,188 1,892
Partnership investments 1,121 958
Deposit with IRS 1,007 386
Income tax receivable 488 -
Accrued interest receivable 478 564
Deferred tax asset 301 -
Other real estate owned 231 159
Prepaid pension and other expenses 84 116
Other 212 177
Total $10,112 $7,023
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. Therefore,
the Bancorp’s BOLI policies are intended to be long-term
investments to provide funding for future payment of long-term
liabilities. The Bancorp records these BOLI policies within other
assets in the Consolidated Balance Sheets at each policy’s
respective cash surrender value, with changes recorded in other
noninterest income in the Consolidated Statements of Income.
Certain BOLI policies have a stable value agreement through
either a large, well-rated bank or multi-national insurance carrier
that provides limited cash surrender value protection from
declines in the value of each policy’s underlying investments.
During 2008, the value of the investments underlying one of the
Bancorp’s BOLI policies continued to decline due to disruptions
in the credit markets, widening of credit spreads between U.S.
treasuries/swaps versus municipal bonds and bank trust preferred
securities, and illiquidity in the asset-backed securities market.
These factors caused the decline in the cash surrender value to
exceed the protection provided by the stable value agreement.
As a result of exceeding the cash surrender value protection,
the Bancorp recorded charges totaling $215 million and $177
million during 2008 and 2007, respectively, to reflect declines in
the cash surrender value related to this policy. The cash surrender
value of this BOLI policy was $291 million at December 31, 2008.
In 2009, the cash surrender value of this policy may increase or
decrease further depending on market conditions related to the
underlying investments. At December 31, 2008, the cash
surrender value protection had not been exceeded for any other
BOLI policy.
Fifth Third Community Development Corporation (CDC), a
wholly owned subsidiary of the Bancorp, was created to invest in
Low Income Housing, Historic Rehabilitation, and New Market
Tax Credit projects that support community revitalization and the
creation of affordable housing. CDC generally co-invests with
other unrelated companies and/or individuals. CDC typically
makes investments in a separate legal entity that owns the
property under development. The entities are usually limited
partnerships, and CDC serves as a limited partner. The developers
are the general partners that oversee the day-to-day operations of
the entity. Pursuant to FIN 46(R), the Bancorp has determined
that these entities are Variable Interest Entities (VIEs) and that
the Bancorp’s investments represent variable interests. The
Bancorp has also determined it is not the primary beneficiary of
the VIEs because the general partners are more closely associated
to the VIEs and will absorb the majority of the VIEs’ expected
losses. Therefore the Bancorp accounts for these investments
using the equity method. At December 31, 2008 and 2007, these
investments, including unfunded commitments, are recorded in
partnership investments and had carrying amounts of $1.0 billion
and $871 million, respectively. Also at December 31, 2008 and
2007, the unfunded commitments related to these VIEs were
included in other liabilities and were $302 million and $307
million, respectively. The Bancorp’s maximum exposure to loss
as a result of its involvement with the VIEs is limited to the
carrying amounts of the investments.
At December 31, 2008, other assets included a deposit of
approximately $1 billion with the IRS pertaining to Internal
Revenue Code section 6603 for taxes associated with the
leveraged lease portfolio. This deposit enables the Bancorp to
stop the accrual of interest, to the extent of the deposits, if the
Bancorp is not ultimately successful in its legal dispute. Refer to
Note 22 for further information.
13. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are
classified as short term. Federal funds purchased are excess
balances in reserve accounts held at Federal Reserve Banks that
the Bancorp purchased from other member banks on an
overnight basis. Bank notes are promissory notes issued by the
Bancorp’s subsidiary banks. Other short-term borrowings include
securities sold under repurchase agreements, FHLB advances and
other borrowings with original maturities of one year or less. In
2008, there was a reduction in the overnight federal funds
purchased year-end balance due to the receipt of $3.4 billion in
equity funding on December 31, 2008 under the CPP and an
increase in other short-term borrowings primarily through the
purchase of term funding through FHLB advances and Term
Auction Facility Funds. A summary of short-term borrowings
and weighted-average rates follows:
2008 2007 2006
($ in millions) Amount Rate Amount Rate Amount Rate
As of December 31:
Federal funds purchased $287 .18% $4,427 3.29% $1,421 5.26%
Other short-term borrowings 9,959 1.42 4,747 3.90 2,796 4.04
Average for the years ended December 31:
Federal funds purchased $2,975 2.34% $3,646 5.04% $4,148 5.02%
Other short-term borrowings 7,785 2.29 3,244 4.32 4,522 4.28
Maximum month-end balance:
Federal funds purchased $6,233 $5,130 $5,434
Other short-term borrowings 13,864 5,381 6,287