Fifth Third Bank 2014 Annual Report Download - page 133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
131 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions) 2014 2013
Pass $ 3,483 3,651
Special mention 147 99
Substandard 299 355
Doubtful 45 24
Total $ 3,974 4,129
At December 31, 2014 and 2013, the Bancorp had outstanding
letters of credit that were supporting certain securities issued as
VRDNs. The Bancorp facilitates financing for its commercial
customers, which consist of companies and municipalities, by
marketing the VRDNs to investors. The VRDNs pay interest to
holders at a rate of interest that fluctuates based upon market
demand. The VRDNs generally have long-term maturity dates, but
can be tendered by the holder for purchase at par value upon proper
advance notice. When the VRDNs are tendered, a remarketing
agent generally finds another investor to purchase the VRDNs to
keep the securities outstanding in the market. As of December 31,
2014 and 2013, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $1.7 billion and $2.1 billion of which FTS acted as the
remarketing agent to issuers on $1.4 billion and $1.8 billion,
respectively. As remarketing agent, FTS is responsible for finding
purchasers for VRDNs that are put by investors. The Bancorp
issued letters of credit, as a credit enhancement, to $1.2 billion and
$1.5 billion of the VRDNs remarketed by FTS, in addition to $247
million and $300 million in VRDNs remarketed by third parties at
December 31, 2014 and 2013, respectively. These letters of credit
are included in the total letters of credit balance provided in the
previous table.
Forward contracts to sell mortgage loans
The Bancorp enters into forward contracts to economically hedge
the change in fair value of certain residential mortgage loans held
for sale due to changes in interest rates. The outstanding notional
amounts of these forward contracts are included in the summary of
significant commitments table for all periods presented.
Noncancelable lease obligations and other commitments
The Bancorp’s subsidiaries have entered into a number of
noncancelable lease agreements. The minimum rental commitments
under noncancelable lease agreements are shown in the summary of
significant commitments table. The Bancorp has also entered into a
limited number of agreements for work related to banking center
construction and to purchase goods or services.
Contingent Liabilities
Private mortgage reinsurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain PMI provided by third-party insurers. In
some instances, these insurers cede a portion of the PMI premiums
to the Bancorp, and the Bancorp provides reinsurance coverage
within a specified range of the total PMI coverage. The Bancorp’s
reinsurance coverage typically ranges from 5% to 10% of the total
PMI coverage. The Bancorp’s maximum exposure in the event of
nonperformance by the underlying borrowers is equivalent to the
Bancorp’s total outstanding reinsurance coverage, which was $29
million at December 31, 2014 and $37 million at December 31,
2013. As of December 31, 2014 and 2013, the Bancorp maintained a
reserve of $2 million and $10 million, respectively, related to
exposures within the reinsurance portfolio which was included in
other liabilities in the Consolidated Balance Sheets. During 2009, the
Bancorp suspended the practice of providing reinsurance of PMI
for newly originated mortgage loans.
Legal claims
There are legal claims pending against the Bancorp and its
subsidiaries that have arisen in the normal course of business. Refer
to Note 18 for additional information regarding these proceedings.
Guarantees
The Bancorp has performance obligations upon the occurrence of
certain events under financial guarantees provided in certain
contractual arrangements as discussed in the following sections.
Residential mortgage loans sold with representation and warranty provisions
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
provisions. A contractual liability arises only in the event of a breach
of these representations and warranties and, in general, only when a
loss results from the breach. The Bancorp may be required to
repurchase any previously sold loan or indemnify (make whole) the
investor or insurer for which the representation or warranty of the
Bancorp proves to be inaccurate, incomplete or misleading.
The Bancorp establishes a residential mortgage repurchase
reserve related to various representations and warranties that reflects
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to make
subjective and complex judgments about matters that are inherently
uncertain, such as, future demand expectations, economic factors
and the specific characteristics of the loans subject to repurchase.
Such factors incorporate historical investor audit and repurchase
demand rates, appeals success rates, historical loss severity and any
additional information obtained from the GSEs regarding future
mortgage repurchase and file request criteria. At the time of a loan
sale, the Bancorp records a representation and warranty reserve at
the estimated fair value of the Bancorp’s guarantee and continually
updates the reserve during the life of the loan as losses in excess of
the reserve become probable and reasonably estimable. The
provision for the estimated fair value of the representation and
warranty guarantee arising from the loan sales is recorded as an
adjustment to the gain on sale, which is included in other
noninterest income at the time of sale. Updates to the reserve are
recorded in other noninterest expense.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million, after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
As of December 31, 2014 and 2013, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $35 million and $44 million, respectively,
included in other liabilities in the Consolidated Balance Sheets.