Fifth Third Bank 2009 Annual Report Download - page 62

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
60 Fifth Third Bancorp
OFF-BALANCE SHEET ARRANGEMENTS
The Consolidated Financial Statements include the accounts of
the Bancorp and its majority-owned subsidiaries and variable
interest entities (VIEs) in which the Bancorp has been determined
to be the primary beneficiary. Other entities, including certain
joint ventures, in which the Bancorp has the ability to exercise
significant influence over operating and financial policies of the
investee, but upon which the Bancorp does not possess control,
are accounted for by the equity method and not consolidated.
Those entities in which the Bancorp does not have the ability to
exercise significant influence 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 16 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 discussion in further detail of these
transactions is provided below.
Commercial Loan Sales to a QSPE
Through 2008, the Bancorp had transferred at par, 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
outstanding balance of these loans at December 31, 2009 and
2008 was $771 million and $1.9 billion, respectively. 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, ineligible loans transferred by the Bancorp
to the QSPE, the inability of the QSPE to issue commercial
paper, and in certain circumstances, bankruptcy preferences
initiated against underlying borrowers. The maximum amount of
credit risk in the event of nonperformance by the underlying
borrowers is approximately equivalent to the total outstanding
balance. During the years ended December 31, 2009 and 2008, the
QSPE did not transfer any loans back to the Bancorp as a result
of a credit event.
The QSPE issues commercial paper and uses the proceeds to
fund the acquisition of commercial loans transferred to it by the
Bancorp. The ability of the QSPE to issue commercial paper is a
function of general market conditions and the credit rating of the
liquidity provider. In the event the QSPE is unable to issue
commercial paper, the Bancorp has agreed to provide liquidity
support in the form of a line of credit to the QSPE and the
repurchase of assets from the QSPE. As of December 31, 2009
and 2008, the liquidity asset purchase agreement (LAPA) was $1.4
billion and $2.8 billion, respectively. In addition to the liquidity
support options discussed above, the Bancorp has also purchased
commercial paper issued by the QSPE. Beginning in 2008 and
continuing through the year ended December 31, 2009,
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 purchased commercial
paper throughout 2008 and 2009. As of December 31, 2009 and
2008, the Bancorp held approximately $805 million and $143
million, respectively, of asset-backed commercial paper issued by
the QSPE, representing 87% and 7%, respectively, 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 LAPA. The
Bancorp did not purchase any commercial loans from the QSPE
during 2009. Fair value adjustments of $3 million were recorded
on these loans upon repurchase. As of December 31, 2009 and
2008, there were no outstanding balances on the line of credit
from the Bancorp to the QSPE.
In June of 2009, the FASB issued guidance amending the
accounting for QSPEs and the consolidation of VIEs. Upon
adoption of this guidance on January 1, 2010, the Bancorp has
determined that it is the primary beneficiary (and therefore
consolidator) of this QSPE. Refer to Note 1 of the Notes to
Consolidated Financial Statements for further details regarding the
guidance and the related impact of adoption by the Bancorp.
Loan Securitizations
The Bancorp utilizes securitization trusts, formed by independent
third parties to facilitate the securitization process of residential
mortgage loans, certain automobile loans and other consumer
loans. During 2008, the Bancorp sold $2.7 billion of automobile
loans in three separate transactions. Each transaction isolated the
related loans through the use of a securitization trust or a conduit,
formed as QSPEs, to facilitate the securitization process in
accordance with U.S. GAAP. The QSPEs issued asset-backed
securities with varying levels of credit subordination and payment
priority. The investors in these securities have no credit recourse
to the Bancorp’s other assets for failure of debtors to pay when
due. During 2008 and 2009, required repurchases of previously
transferred automobile loans from the QSPE were immaterial to
the Bancorp’s Consolidated Financial Statements. For further
information on these automobile securitizations, see Note 11 of
the Notes to Consolidated Financial Statements. Upon adoption
on January 1, 2010 of the FASB guidance on the accounting for
QSPEs and VIEs, the Bancorp has determined that it is the
primary beneficiary (and therefore consolidator) of these QSPEs.
Refer to Note 1 of the Notes to Consolidated Financial
Statements for further information regarding the impact of new
accounting guidance on the QSPEs related to the automobile
securitizations.
Residential Mortgage Loan Sales
The Bancorp previously sold certain residential mortgage loans in
the secondary market with credit recourse. 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 securing the loan. At December
31, 2009 and 2008, the outstanding balances on these loans sold
with credit recourse were approximately $1.1 billion and $1.3
billion, respectively. At December 31, 2009 and 2008, the Bancorp
maintained an estimated credit loss reserve on these loans sold
with credit recourse of approximately $21 million and $20 million,
respectively, recorded in other liabilities in the Consolidated
Balance Sheets. To determine the credit loss reserve, the Bancorp
used an approach that is consistent with its overall approach in
estimating credit losses for various categories of residential
mortgage loans held in its loan portfolio. In addition, conforming
residential mortgage loans sold to unrelated third parties are
generally sold with representation and warranty recourse
provisions. Under these provisions, the Bancorp is required to
repurchase any previously sold loan for which the representation
or warranty of the Bancorp proves to be inaccurate, incomplete or
misleading. As of December 31, 2009 and 2008, the Bancorp
maintained a reserve related to these loans sold with the
representation and warranty recourse provision of $17 million and
$6 million, respectively. For further information on residential
mortgage loans sold with recourse, see Note 16 of the Notes to
Consolidated Financial Statements.