Fifth Third Bank 2009 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
40 Fifth Third Bancorp
Investment Securities
The Bancorp uses investment securities as a means of managing
interest rate risk, providing liquidity support and providing
collateral for pledging purposes. As of December 31, 2009, total
investment securities were $18.9 billion compared to $14.3 billion
at December 31, 2008. See Note 1 of the Notes to Consolidated
Financial Statements for the Bancorp’s classification of
investment securities and management’s evaluation of securities in
an unrealized loss position for OTTI. During the year ended
December 31, 2009, OTTI on available-for-sale and held-to-
maturity securities was immaterial to the Bancorp’s consolidated
financial statements.
At December 31, 2009, the Bancorp’s investment portfolio
primarily consisted of AAA-rated agency mortgage-backed
securities. The investment portfolio includes FHLMC preferred
stock and FNMA preferred securities with carrying values as of
December 31, 2009 and 2008 of $3 million and $1 million,
respectively, after recognizing OTTI charges of $67 million during
2008. The Bancorp also recognized OTTI charges of $37 million
on certain trust preferred securities in 2008, which have a carrying
value of $102 million and $79 million, as of December 31, 2009
and 2008, respectively. Upon a change in U.S. GAAP in 2009, the
Bancorp concluded that the OTTI charges on these trust
preferred debt securities were due to non-credit related factors
and therefore, recognized an increase of $37 million to the
investment balance and related unrealized losses. See Note 1 to
the Notes to Consolidated Financial Statements for further
information on the Bancorp’s accounting for OTTI.
The Bancorp did not hold asset-backed securities backed by
subprime mortgage loans in its investment portfolio at or for the
year ended December 31, 2009. Additionally, there was
approximately $178 million of securities classified as below
investment grade as of December 31, 2009, the majority of which
was made up of the above mentioned trust preferred securities.
Trading securities decreased from $1.2 billion at December
31, 2008 to $355 million at December 31, 2009. The decrease was
driven by the sale of VRDNs which were held by the Bancorp in
its trading securities portfolio. These securities were purchased
from the market during 2008 and 2009 through FTS who was also
the remarketing agent. During the fourth quarter of 2009, the
rates on these securities began to decline substantially, and as a
result the Bancorp sold a majority of its VRDNs and replaced
them with higher-yielding investments. For more information on
the VRDNs, see Note 16 of the Notes to Consolidated Financial
Statements. Included in trading securities as of December 31,
2009 were $13 million of auction rate securities, which had an
unrealized loss of $4 million. The Bancorp did not hold auction
rate securities in its trading portfolio during 2008.
On an amortized cost basis, as of December 31, 2009,
available-for-sale securities increased $5.3 billion from December
31, 2008. In the first quarter of 2009, financial market volatility
created attractive investment opportunities. As a result, the
Bancorp purchased $1.4 billion in AAA-rated automobile asset-
backed securities and $1.5 billion of agency issued mortgage
backed securities and debentures to manage the interest rate risk
of the Bancorp. In addition, during the fourth quarter of 2009 the
Bancorp continued to purchase similar agency and non-agency
mortgage-backed securities to replace the VRDNs, as the rates on
mortgage-backed and other available-for-sale securities presented
better investment opportunities than the VRDNs, which were
experiencing declining coupon rates. At December 31, 2009,
available-for-sale securities increased to 18% of interest-earning
assets, compared to 12% at December 31, 2008, primarily due to a
30% increase in agency mortgage-backed securities as discussed
above, and a two percent decrease in total interest earning assets,
driven by a $6.7 billion, or eight percent, decline in total loans and
leases. The estimated weighted-average life of the debt securities
in the available-for-sale portfolio was 4.4 years at December 31,
2009 compared to 3.2 years at December 31, 2008. The increase in
the weighted-average life of the debt securities portfolio was
primarily driven by the weighted-average lives of agency
mortgage-backed securities. This can be attributed to a general
decline in estimates of prepayment speeds as the combination of a
portfolio with lower coupon rates compared to prior year and the
stabilization of mortgage interest rates has led to a portfolio with a
longer average life. At December 31, 2009, the fixed-rate securities
within the available-for-sale securities portfolio had a weighted-
average yield of 4.48% compared to 5.08% at December 31, 2008.
Since the second half of 2007, the Bancorp purchased
investment grade commercial paper from an unconsolidated
QSPE that is wholly owned by an independent third-party. The
commercial paper has maturities ranging from one day to 90 days
and is backed by the assets held by the QSPE. As of December
31, 2009 and 2008, the Bancorp held $805 million and $143
million, respectively, of this commercial paper in its available-for-
sale portfolio. Refer to the Off-balance Sheet Arrangements
section in Management’s Discussion and Analysis for more
information on the QSPE.
Information presented in Table 21 is on a weighted-average
life basis, anticipating future prepayments. Yield information is
presented on an FTE basis and is computed using historical cost
balances. Maturity and yield calculations for the total available-for-
sale portfolio exclude equity securities that have no stated yield or
maturity. Market rates began to decline in the fourth quarter of
2008 and throughout 2009. This market rate decline led to
unrealized gains on agency mortgage-backed securities of $323
million and $152 million as of December 31, 2009 and 2008,
respectively. Total net unrealized gains on the available-for-sale
securities portfolio was $334 million at December 31, 2009
compared to $178 million at December 31, 2008.
TABLE 20: COMPONENTS OF INVESTMENT SECURITIES
A
s of December 31 ($ in millions) 2009 2008 2007 2006 2005
A
vailable-for-sale and other: (amortized cost basis)
U.S. Treasury and Government agencies $464 186 3 1,396 506
U.S. Government sponsored agencies 2,143 1,651 160 100 2,034
Obligations of states and political subdivisions 240 323 490 603 657
Agency mortgage-backed securities 11,074 8,529 8,738 7,999 16,127
Other bonds, notes and debentures 2,541 613 385 172 2,119
Other securities 1,417 1,248 1,045 966 1,090
Total available-for-sale and other $17,879 12,550 10,821 11,236 22,533
Held-to-maturity:
Obligations of states and political subdivisions $350 355 351 345 378
Other bonds, notes and debentures 55 4 11 11
Total held-to-maturity $355 360 355 356 389
Trading:
Variable rate demand notes $235 1,140 - - -
Other securities 120 51 171 187 117
Total trading $355 1,191 171 187 117