Fifth Third Bank 2010 Annual Report Download - page 93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 91
Temporary impairment or impairment recovery, effected through a
change in the MSR valuation allowance, is captured as a
component of mortgage banking net revenue in the Consolidated
Statements of Income. The Bancorp maintains a non-qualifying
hedging strategy to manage a portion of the risk associated with
changes in value of the MSR portfolio. This strategy includes the
purchase of free-standing derivatives and various available-for-sale
securities. The interest income, mark-to-market adjustments and
gain or loss from sale activities associated with these portfolios are
expected to economically hedge a portion of the change in value of
the MSR portfolio caused by fluctuating discount rates, earnings
rates and prepayment speeds.
The fair value of the servicing asset is based on the present value of expected future cash flows. The following table displays the beginning and
ending fair value for the years ended December 31:
($ in millions) 2010 2009
Fixed rate residential mortgage loans:
Fair value at beginning of period $667 458
Fair value at end of period 791 667
A
d
j
ustable rate residential mortgage loans:
Fair value at beginning of period 32 38
Fair value at end of period 31 32
The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy, which is
included in the Consolidated Statements of Income for the years ended December 31:
($ in millions) 2010 2009 2008
Securities gains, net – non-qualifying hedges on MSRs $14 57 120
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio (Mortgage banking net revenue) 109 41 89
Provision for MSR impairment (Mortgage banking net revenue) (36) (24) (207)
As of December 31, 2010 and 2009, the key economic assumptions
used in measuring the interests that continued to be held by the
Bancorp at the date of sale or securitization resulting from
transactions completed during the years ended December 31, 2010
and 2009 were as follows:
Based on historical credit experience, expected credit losses for
residential mortgage loan servicing assets have been deemed
immaterial, as the Bancorp sold the majority of the underlying
loans without recourse. At December 31, 2010 and 2009, the
Bancorp was servicing $54.2 billion and $48.6 billion, respectively,
of residential mortgage loans for other investors. The value of
interests that continue to be held by the Bancorp is subject to
credit, prepayment and interest rate risks on the sold financial
assets. At December 31, 2010, the sensitivity of the current fair
value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions are as follows:
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a
10% and 20% variation in assumptions typically cannot be
extrapolated because the relationship of the change in assumption
to the change in fair value may not be linear. Also, in the previous
table, the effect of a variation in a particular assumption on the fair
value of the interests that continue to be held by the Bancorp is
calculated without changing any other assumption; in reality,
changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or
counteract the sensitivities.
Automobile Loan Securitizations
During 2008, the Bancorp sold $2.7 billion of automobile loans in
three separate transactions, recognizing gains of $15 million, offset
by $26 million in losses on related hedges. Each transaction
isolated the related loans through the use of a securitization trust or
a conduit, formed as QSPEs, to facilitate the securitization process.
The QSPEs issued asset-backed securities with varying levels of
December 31, 2010 December 31, 2009
Rate
Weighted-
Average
Life
(in years)
Prepayment
Speed
(annual)
Discount
Rate
(annual)
Weighted-
Average
Default
Rate
Weighted-
Average
Life
(in years)
Prepayment
Speed
(annual)
Discount
Rate
(annual)
Weighted-
Average
Default
Rate
Residential mortgage loans:
Servicing assets Fixed 6.7 10.7% 10.3% N/A 6.6 12.0% 9.8% N/A
Servicing assets Adjustable 3.6 23.3 11.3 N/A 2.7 35.5 10.8 N/A
Weighted-
Average
Life (in
years)
Prepayment Speed
Assumption Residual Servicing Cash Flows
Weighted-Average
Default
Fair
Impact of Adverse
Change on Fair
Value Discount
Impact of Adverse
Change on Fair
Value
Impact of Adverse
Change on Fair
Value
($ in millions) Rate Value Rate 10% 20% Rate 10% 20% Rate 10% 20%
Residential mortgage loans:
Servicing assets Fixed $791 5.9 13.0% ($36) (70) 10.6% ($30) (58) - % $ - -
Servicing assets Adjustable 31 3.0 26.2 (2) (3) 11.9 (1) (2) - - -