Fifth Third Bank 2014 Annual Report Download - page 83

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
81 Fifth Third Bancorp
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial
transactions that are considered off-balance sheet arrangements as
they involve varying elements of market, credit and liquidity risk in
excess of the amounts recognized in the Bancorp’s Consolidated
Balance Sheets. The Bancorp’s off-balance sheet arrangements
include commitments, contingent liabilities, guarantees, and
transactions with non-consolidated VIEs. A brief discussion of
these transactions is as follows:
Commitments
The Bancorp has certain commitments to make future payments
under contracts, including commitments to extend credit, letters of
credit, forward contracts related to held for sale mortgage loans,
noncancelable lease obligations, capital commitments for private
equity investments and purchase obligations. Refer to Note 17 of
the Notes to Consolidated Financial Statements for additional
information on commitments.
Guarantees and Contingent Liabilities
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. The change in
the reserve was due to a decrease in both the outstanding exposure
and expected losses. During 2009, the Bancorp suspended the
practice of providing reinsurance of PMI for newly originated
mortgage loans.
The Bancorp has performance obligations upon the occurrence
of certain events provided in certain contractual arrangements,
including residential mortgage loans sold with representation and
warranty provisions or credit recourse. Refer to Note 17 of the
Notes to Consolidated Financial Statements for additional
information on guarantees and contingent liabilities.
Transactions with Non-consolidated VIEs
The Bancorp engages in a variety of activities that involve VIEs,
which are legal entities that lack sufficient equity to finance their
activities, or the equity investors of the entities as a group lack any
of the characteristics of a controlling interest. The investments in
those entities in which the Bancorp was determined not to be the
primary beneficiary but holds a variable interest in the entity are
accounted for under the equity method of accounting or other
accounting standards as appropriate and not consolidated. Refer to
Note 10 of the Notes to Consolidated Financial Statements for
additional information on non-consolidated VIEs.