Fifth Third Bank 2013 Annual Report Download - page 123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
121 Fifth Third Bancorp
The following table displays the beginning and ending fair value of the servicing assets for the years ended December 31:
($ in millions) 2013 2012
Fixed rate residential mortgage loans:
Beginning balance $ 664 649
Ending balance 929 664
A
d
j
ustable rate residential mortgage loans:
Beginning balance 33 32
Ending balance 38 33
Fixed rate automobile loans:
Beginning balance --
Ending balance 4 -
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) 2013 2012 2011
Securities gains, net - non-qualifying hedges on MSRs $13 3 9
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio (Mortgage banking net revenue) (30) 63 344
Recovery of (provision for) MSR impairment (Mortgage banking net revenue) 192 (103) (242)
A
s of December 31, 2013 and 2012, the key economic assumptions used in measuring the interests in residential mortgage loans 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 were as
follows:
2013 2012
Rate
Weighted-
A
verage Life
(in years)
Prepayment
Speed (annual)
Discount Rate
(annual)
Weighted-
Average
Default rate
Weighted-
A
verage Life
(in years)
Prepayment
Speed (annual)
Discount Rate
(annual)
Weighted-
Average
Default rate
Residential mortgage loans:
Servicing assets Fixed 7.3 9.1 % 10.2 % N/
A
6.9 9.6 % 10.4 % N/A
Servicing assets Adjustable 3.6 22.8 11.5 N/
A
3.8 22.0 11.4 N/A
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, 2013 and 2012, the Bancorp
serviced $69.2 billion and $62.5 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
A
t December 31, 2013, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment Residual Servicing
Speed Assumption Cash Flows
Fair
Weighted-
Average
Life (in
Impact of Adverse Change
on Fair Value Discount
Impact of Adverse
Change on Fair
Value
($ in millions)(a) Rate Value years) Rate 10% 20% 50% Rate 10% 20%
Residential mortgage loans:
Servicing assets Fixed $929 6.8 10.3 % $ (36) (69) (157) 10.4 % $ (37) (72)
Servicing assets Adjustable 38 3.2 25.6 (2) (3) (7) 11.6 (1) (2)
(a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, changes in fair value based on these
variations in the assumptions typically cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. The Bancorp believes variations of
these levels are reasonably possible; however, there is the potential
that adverse changes in key assumptions could be even greater.
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), which might magnify or counteract these
sensitivities.