Fifth Third Bank 2011 Annual Report Download - page 122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
120 Fifth Third Bancorp
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 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 the Covered Litigation is settled. The Bancorp
calculates the fair value of the swap based on its estimate of the
probability and timing of certain Covered Litigation settlement
scenarios and the resulting payments related to the swap. The
counterparty to the swap as a result of its ownership of the Class B
shares will be impacted by dilutive adjustments to the conversion
rate of the Class B shares into Class A shares caused by any Covered
Litigation losses in excess of the litigation escrow account. If actual
judgments in, or settlements of, the Covered Litigation significantly
exceed current expectations, then additional funding by Visa of the
litigation escrow account and the resulting dilution of the Class B
shares could result in a scenario where the Bancorp’s ultimate
exposure associated with the Covered Litigation (the “Visa
Litigation Exposure”) exceeds the value of the Class B shares
owned by the swap counterparty (the “Class B Value”). In the event
the Bancorp concludes that it is probable that the Visa Litigation
Exposure exceeds the Class B Value, the Bancorp would record a
litigation reserve liability and a corresponding amount of other
noninterest expense for the amount of the excess. Any such
litigation reserve liability would be separate and distinct from the
fair value derivative liability associated with the total return swap.
As of the date of the Bancorp’s sale of Visa Class B shares and
through December 31, 2011, the Bancorp has concluded that it is
not probable that the Visa Litigation Exposure will exceed the Class
B Value. Based on this determination, upon the sale of Class B
shares, the Bancorp reversed its net Visa litigation reserve liability
and recognized a free-standing derivative liability associated with the
total return swap with an initial fair value of $55 million. 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 for
the year ended December 31, 2009. In the second quarter of 2010,
Visa funded an additional $500 million into the escrow account
which resulted in further dilution in the conversion of Class B
shares into Class A shares and required the Bancorp to make a $20
million cash payment (which reduced the swap liability) to the swap
counterparty in accordance with the terms of the swap contract. In
the fourth quarter of 2010, Visa funded an additional $800 million
into the litigation escrow account which resulted in further dilution
in the conversion of Class B shares into Class A shares and required
the Bancorp to make a $35 million cash payment (which reduced
the swap liability) to the swap counterparty in accordance with the
terms of the swap contract. In the second quarter of 2011, Visa
funded an additional $400 million into the litigation escrow account.
Upon Visa’s funding of the litigation escrow account in the second
quarter of 2011, along with additional terms of the total return
swap, the Bancorp made a $19 million cash payment (which reduced
the swap liability) to the swap counterparty. During the fourth
quarter of 2011, Visa announced it decided to fund an additional
$1.565 billion into the litigation escrow account which increased the
swap liability approximately $54 million. The fair value of the swap
liability was $78 million as of December 31, 2011, compared to $18
million at December 31, 2010.