Fifth Third Bank 2009 Annual Report Download - page 80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
78 Fifth Third Bancorp
As shown previously, the Bancorp engages in commercial and
consumer lease products primarily related to the financing of
commercial equipment and automobiles. The Bancorp had $3.2
billion of direct financing leases and $2.0 billion of leveraged
leases at December 31, 2009 compared to $3.4 billion and $2.4
billion, respectively, at December 31, 2008.
Pre-tax income from leveraged leases for 2009 was $57 million
compared to a pre-tax loss in 2008 of $97 million and pre-tax
income in 2007 of $47 million. The tax effect of this income was
an expense of $10 million in 2009, a tax benefit of $37 million in
2008 and tax expense of $18 million in 2007.
The components of the investment in lease financing at December 31:
($ in millions) 2009 2008
Rentals receivable, net of principal and interest on nonrecourse debt $4,174 4,415
Estimated residual value of leased assets 1,028 1,381
Initial direct cost, net of amortization 19 24
Gross investment in lease financing 5,221 5,820
Unearned income (1,186) (1,384)
Net investment in lease financing $4,035 4,436
The Bancorp periodically reviews residual values associated with
its leasing portfolio. Declines in residual values that are deemed to
be other-than-temporary are recognized as a loss. The Bancorp
recognized $1 million in residual value write-downs related to
consumer automobile leases and $4 million on commercial leases
for the year ended December 31, 2009 compared to $3 million in
residual value write-downs related to consumer automobile leases
for the year ended December 31, 2008. In 2008, residual value
write-downs on commercial leases were immaterial to the
Bancorp. At December 31, 2009, the minimum future lease
payments receivable for each of the years 2010 through 2014 was
$1.1 billion, $1.1 billion, $.8 billion, $.5 billion and $.6 billion,
respectively.
7. LOANS WITH DETERIORATED CREDIT QUALITY ACQUIRED IN A TRANSFER
In 2008 and 2007, the Bancorp acquired certain loans for which
there was evidence of deterioration of credit quality since
origination and for which it was probable, at acquisition, that all
contractually required payments would not be collected. These
loans were evaluated either individually or segregated into pools
based on common risk characteristics and accounted for under
U.S. GAAP guidance for loans acquired with deteriorated credit
quality. U.S. GAAP requires acquired loans to be recorded at their
initial fair value and prohibits carrying over valuation allowances
when applying purchase accounting. Loans carried at fair value,
mortgage loans held for sale and loans under revolving credit
agreements are excluded from the scope of this guidance on loans
acquired with deteriorated credit quality. During the years ended
December 31, 2009 and 2008, the Bancorp recorded provision
expense for loans acquired with deteriorated credit quality of $21
million and $35 million, respectively, in the Consolidated
Statements of Income. For the year ended December 31, 2007,
there was no provision expense recorded for these loans. In
addition, as of December 31, 2009 and 2008, the Bancorp
maintained an allowance for loan and lease losses of $21 million
and $6 million, respectively, on these loans.
The following table reflects the outstanding balance of all
contractually required payments and carrying amounts of loans
acquired with deteriorated credit quality at December 31:
($ in millions) 2009 2008
Commercial $158 224
Consumer 58 87
Outstanding balance $216 311
Carrying amount $71 106
At the acquisition date, the Bancorp determines the excess of the
loan’s contractually required payments over all cash flows
expected to be collected as an amount that should not be accreted
into interest income (nonaccretable difference). The remaining
amount representing the difference in the expected cash flows of
acquired loans and the initial investment in the acquired loans is
accreted into interest income over the remaining life of the loan or
pool of loans (accretable yield). A summary of activity is provided.
($ in millions)
Accretable
Yield
Balance as of December 31, 2006 $ -
Additions 8
Accretion (2)
Reclassifications from (to) nonaccretable difference -
Balance as of December 31, 2007 $6
Additions 24
Accretion (15)
Reclassifications from (to) nonaccretable difference 13
Balance as of December 31, 2008 $28
Additions -
Accretion (6)
Reclassifications from (to) nonaccretable difference (13)
Balance as of December 31, 2009 $9
The following table reflects loans that were acquired with
deteriorated credit quality during 2009 and 2008:
($ in millions) 2009 2008
Contractually required payments receivable
at acquisition:
Commercial $ - 182
Consumer -34
Total $ - 216
Cash flows expected to be collected at acquisition $ - 90
Fair value of acquired loans at acquisition -66