Fifth Third Bank 2014 Annual Report Download - page 135

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
133 Fifth Third Bancorp
proportional share of losses based on the pre-IPO membership
interests. As part of its reorganization and IPO, the Bancorp’s
indemnification obligation was modified to include only certain
known litigation (the “Covered Litigation”) as of the date of the
restructuring. This modification triggered a requirement for the
Bancorp to recognize a liability equal to the fair value of the
indemnification liability.
In conjunction with the IPO, the Bancorp received 10.1 million
of Visa’s Class B common shares (the “Class B Shares”) based on
the Bancorp’s membership percentage in Visa prior to the IPO. The
Class B Shares are not transferable (other than to another member
bank) until the later of the third anniversary of the IPO closing or
the date which the Covered Litigation has been resolved; therefore,
the Bancorp’s Class B Shares were classified in other assets and
accounted for at their carryover basis of $0. Visa deposited $3
billion of the proceeds from the IPO into a litigation escrow
account, established for the purpose of funding judgments in, or
settlements of, the Covered Litigation. If Visa’s litigation committee
determines that the escrow account is insufficient, then Visa will
issue additional Class A Shares and deposit the proceeds from the
sale of the Class A Shares into the litigation escrow account. When
Visa funds the litigation escrow account, the Class B Shares are
subject to dilution through an adjustment in the conversion rate of
Class B Shares into Class A Shares.
In 2009, the Bancorp completed the sale of the Class B Shares
and 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. Refer to Note 27 for
additional information on the valuation of 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 the Class B Shares and
through December 31, 2014, 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 the 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. The fair value of the swap liability was $49 million
and $48 million at December 31, 2014 and 2013, respectively. Refer
to Notes 12 and 18 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilution in the conversion of Class B Shares into
Class A Shares, and along with other terms of the total return swap,
required the Bancorp to make cash payments to the swap
counterparty as follows:
($ in millions)
Visa Bancorp Cash
Period Funding Amount Payment Amount
Q2 2010 $500 $20
Q4 2010 800 35
Q2 2011 400 19
Q1 2012 1,565 75
Q3 2012 150 6
Q3 2014 450 18