Fifth Third Bank 2012 Annual Report Download - page 113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
111 Fifth Third Bancorp
Bancorp exercised its cleanup call option on the remaining
automobile securitization conduit and acquired all remaining
automobile loans, the proceeds of which were used by the conduit
to repay outstanding debt.
The economic performance of the VIEs was most significantly
impacted by the performance of the underlying loans. The principal
risks to which the entities were exposed include credit risk and
interest rate risk. Credit risk was managed through credit
enhancement in the form of reserve accounts, overcollateralization,
excess interest on the loans, the subordination of certain classes of
asset-backed securities to other classes, and in the case of the home
equity transaction, an insurance policy with a third party
guaranteeing payment of accrued and unpaid interest and principal
on the securities. Interest rate risk was managed by interest rate
swaps between the VIEs and third parties.
CDC Investments
CDC, a wholly owned subsidiary of the Bancorp, was created to
invest in projects to create affordable housing, revitalize business
and residential areas, and preserve historic landmarks. CDC
generally co-invests with other unrelated companies and/or
individuals and typically makes investments in a separate legal entity
that owns the property under development. The entities are usually
formed as limited partnerships and LLCs, and CDC typically invests
as a limited partner/investor member in the form of equity
contributions. The economic performance of the VIEs is driven by
the performance of their underlying investment projects as well as
the VIEs’ ability to operate in compliance with the rules and
regulations necessary for the qualification of tax credits generated by
equity investments. Typically, the general partner or managing
member will be the party that has the right to make decisions that
will most significantly impact the economic performance of the
entity. The Bancorp serves as the managing member of certain
LLCs invested in business revitalization projects. The Bancorp has
provided an indemnification guarantee to the investor member of
these LLCs related to the qualification of tax credits generated by
the investor member’s investment. Accordingly, the Bancorp
concluded that it is the primary beneficiary and, therefore, has
consolidated these VIEs. As a result, the investor members’
interests in these VIEs are presented as noncontrolling interests in
the Bancorp’s Consolidated Financial Statements. This presentation
includes reporting separately the equity attributable to the
noncontrolling interests in the Consolidated Balance Sheets and
Consolidated Statements of Changes in Equity and reporting
separately the comprehensive income attributable to the
noncontrolling interests in the Consolidated Statements of Income
and Consolidated Statements of Comprehensive Income.
Additionally, the net income attributable to the noncontrolling
interests is reported separately in the Consolidated Statements of
Income. The Bancorp’s maximum exposure related to these
indemnifications at December 31, 2012 and 2011 was $18 million
and $10 million, respectively, which is based on an amount required
to meet the investor member’s defined target rate of return.
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Bancorp’s Consolidated Balance Sheets related to non-consolidated
V
IEs for which the Bancorp holds a variable interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure
to losses associated with its interests in the entities:
Total Total Maximum
A
s of December 31, 2012 ($ in millions) Assets Liabilities Exposure
CDC investments $1,442 394 1,442
Private equity investments 189 - 310
Loans provided to VIEs 1,622 - 2,465
Restructured loans 2 - 2
Total Total Maximum
A
s of December 31, 2011 ($ in millions) Assets Liabilities Exposure
CDC investments $1,243 269 1,243
Private equity investments 161 3 327
Money market funds 53 - 62
Loans provided to VIEs 1,370 - 2,203
Restructured loans 10 - 12
CDC Investments
As noted previously, CDC typically invests in VIEs as a limited
partner or investor member in the form of equity contributions. The
Bancorp has determined that it is not the primary beneficiary of
these VIEs because it lacks the power to direct the activities that
most significantly impact the economic performance of the
underlying project or the VIEs’ ability to operate in compliance with
the rules and regulations necessary for the qualification of tax
credits generated by equity investments. This power is held by the
general partners/managing members who exercise full and exclusive
control of the operations of the VIEs. Accordingly, the Bancorp
accounts for these investments under the equity method of
accounting.
The Bancorp’s funding requirements are limited to its invested
capital and any additional unfunded commitments for future equity
contributions. The Bancorp’s maximum exposure to loss as a result
of its involvement with the VIEs is limited to the carrying amounts
of the investments, including the unfunded commitments. The
carrying amounts of these investments, which are included in other
assets in the Consolidated Balance Sheets, and the liabilities related
to the unfunded commitments, which are included in other liabilities
in the Consolidated Balance Sheets, are included in the previous
tables for all periods presented. The Bancorp has no other liquidity
arrangements or obligations to purchase assets of the VIEs that
would expose the Bancorp to a loss. In certain arrangements, the
general partner/managing member of the VIE has guaranteed a
level of projected tax credits to be received by the limited
partners/investor members, thereby minimizing a portion of the
Bancorp’s risk.