Fifth Third Bank 2009 Annual Report Download - page 94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
92 Fifth Third Bancorp
average life of 2.2 years. 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 Bancorp monitors the credit risk associated with the
underlying borrowers through the same risk grading system
currently utilized for establishing loss reserves in its loan and lease
portfolio. Under this risk rating system as of December 31, 2009,
approximately $683 million of the loans in the QSPE were
classified average or better; approximately $24 million were
classified as watch-list or special mention; approximately $36
million were classified as substandard; and approximately $28
million were classified as doubtful. At December 31, 2009 and
2008, the Bancorp’s loss reserve related to the credit enhancement
provided to the QSPE was $45 million and $37 million,
respectively, and was 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
commercial loans held in its loan portfolio.
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. Fair
value adjustments of $3 million were recorded on these loans
upon repurchase. There were no LAPA purchases in 2009. 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 QSPE’s 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.
Margin accounts
FTS, a subsidiary of the Bancorp, guarantees the collection of all
margin account balances held by its brokerage clearing agent for
the benefit of FTS customers. FTS is responsible for payment to
its brokerage clearing agent for any loss, liability, damage, cost or
expense incurred as a result of customers failing to comply with
margin or margin maintenance calls on all margin accounts. The
margin account balance held by the brokerage clearing agent as of
December 31, 2009 was $8 million compared to $10 million as of
December 31, 2008. In the event of any customer default, FTS
has rights to the underlying collateral provided. Given the
existence of the underlying collateral provided and negligible
historical credit losses, the Bancorp does not maintain a loss
reserve related to the margin accounts.
Long-term borrowing obligations
The Bancorp had fully and unconditionally guaranteed certain
long-term borrowing obligations issued by wholly-owned issuing
trust entities of $2.8 billion as of December 31, 2009 and 2008.
Visa litigation
The Bancorp, as a member bank of Visa prior to Visa’s
completion of their IPO on March 19, 2008, had certain
indemnification obligations pursuant to Visa’s certificate of
incorporation and bylaws and in accordance with their
membership agreements. In accordance with Visa’s by-laws prior
to the IPO, the Bancorp could have been required to indemnify
Visa for the Bancorp’s proportional share of losses based on the
pre-IPO membership interests. In contemplation of the IPO, Visa
announced that it had completed restructuring transactions during
the fourth quarter of 2007. As part of this restructuring, the
Bancorp’s indemnification obligation was modified to include only
certain known litigation as of the date of the restructuring. This
modification triggered a requirement to recognize a $3 million
liability in 2007 equal to the fair value of the indemnification
obligation. Additionally during 2007, the Bancorp recorded $169
million for its share of litigation formally settled by Visa and for
probable future litigation settlements, and during 2008, the
Bancorp recorded additional reserves of $71 million for probable
future litigation settlements. In connection with the IPO in 2008,
Visa retained a portion of the proceeds, totaling $169 million, to
fund an escrow account in order to resolve existing litigation
settlements as well as fund potential future litigation settlements.
During 2009, Visa announced it had deposited an additional
$700 million into the litigation escrow account. As a result of this
funding, the Bancorp recorded its proportional share of $29
million of these additional funds as a reduction to its net Visa
litigation reserve liability and a reduction to noninterest expense.
Later in 2009, the Bancorp completed the sale of its Visa, Inc.
Class B shares for proceeds of $300 million. As part of this
transaction the Bancorp entered into a total return swap in which
the Bancorp will make or receive payments based on subsequent
changes in the conversion rate of the Class B shares into Class A
shares. The swap terminates on the later of the third anniversary
of Visa’s IPO or the date on which certain pre-specified litigation
is finally settled. As a result of the sale of Class B shares and
entering into the swap contract, the Bancorp reversed its net Visa
litigation reserve liability and recognized a free-standing derivative
liability with an initial fair value of $55 million. See Note 12 for
further discussion on this total return swap. The sale of the Class
B shares, recognition of the derivative liability and reversal of the
net litigation reserve liability resulted in a pre-tax benefit of $288
million ($187 million after-tax) recognized by the Bancorp in
2009.