Fifth Third Bank 2003 Annual Report Download - page 32

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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respectively, in deferred losses, net of tax, related to cash flow hedges
were recorded in accumulated nonowner changes in equity. Gains
and losses on derivative contracts that are reclassified from
accumulated nonowner changes in equity to current period earnings
are included in the line item in which the hedged item’s effect in
earnings is recorded. As of December 31, 2003, approximately $5
million in deferred losses, net of tax, on derivative instruments
included in accumulated nonowner changes in equity are expected to
be reclassified into earnings during the next twelve months. All
components of each derivative instrument’s gain or loss are included
in the assessment of hedge effectiveness.
The maximum term over which the Bancorp is hedging its
exposure to the variability of future cash flows is approximately 19
months for hedges converting floating-rate debt to fixed and 15
years for a hedge entered into to fix the purchase price of certain
securities available-for-sale. The Bancorp has approximately $7
million and $26 million of cash flow hedges related to the floating-
rate liabilities included in other liabilities in the December 31, 2003
and 2002 Consolidated Balance Sheets, respectively.
For the year ended December 31, 2003, there were no cash flow
hedges that were discontinued related to forecasted transactions
deemed not probable of occurring.
Free-Standing Derivative Instruments
The Bancorp enters into various derivative contracts that focus on
providing derivative products to commercial customers. These
derivative contracts are not designated against specific assets or
liabilities on the balance sheet or to forecasted transactions and,
therefore, do not qualify for hedge accounting. These instruments
include foreign exchange derivative contracts entered into for the
benefit of commercial customers involved in international trade to
hedge their exposure to foreign currency fluctuations and various other
derivative contracts for the benefit of commercial customers. The
Bancorp economically hedges significant exposures related to these
derivative contracts entered into for the benefit of customers by
entering into offsetting third-party forward contracts with approved
reputable counterparties with matching terms and currencies that are
generally settled daily. Interest rate lock commitments issued on
residential mortgage loan commitments that will be held for resale are
also considered free-standing derivative instruments. The interest rate
exposure on these commitments is economically hedged primarily with
forward contracts. The Bancorp also enters into a combination of free-
standing derivative instruments (PO swaps, swaptions, floors, forward
contracts, options and interest rate swaps) to economically hedge
changes in fair value of its largely fixed rate MSR portfolio.
Additionally, the Bancorp occasionally may enter into free-standing
derivative instruments (options) in order to minimize significant
fluctuations in earnings and cash flows caused by interest rate volatility.
The interest rate lock commitments and free-standing derivative
instruments related to the MSR portfolio are marked to market and
recorded as a component of mortgage banking net revenue, and the
foreign exchange derivative contracts, other customer derivative
contracts and interest rate risk derivative contracts are marked to
market and recorded within other service charges and fees in the
Consolidated Statements of Income.
The net gains (losses) recorded in the Consolidated Statements of
Income relating to free-standing derivative instruments for the years
ended December 31 are summarized below:
($ in millions) 2003 2002 2001
Foreign exchange contracts
for customers . . . . . . . . . . . . . . . . $35 25 23
Forward contracts and
purchased options related to
interest rate lock commitments . . . (1) (2) 2
Free-standing derivative instruments
related to MSR portfolio . . . . . . . . 15 100 17
Free-standing derivative instruments
related to interest rate risk . . . . . . . 6——
As of December 31, 2003, the Bancorp had approximately $234
million and $198 million of free-standing derivatives related to
commercial customer transactions (both foreign exchange related
contracts and other commercial customer related contracts) included
in other assets and other liabilities, respectively, in the Consolidated
Balance Sheet, and $66 million included in both other assets and
other liabilities in the December 31, 2002 Consolidated Balance
Sheet. The following table reflects all other free-standing derivatives
included within other assets at December 31:
($ in millions) 2003 2002
Forward contracts related to interest
rate lock commitments . . . . . . . . . $(1) —
Free-standing derivative instruments
related to MSR portfolio . . . . . . . . 837
Free-standing derivative instruments
related to interest rate risk . . . . . . . 7—
The following table summarizes the Bancorp’s derivative activity
(excluding customer derivatives) at December 31, 2003:
Weighted-Average
Remaining Average Average
Notional Maturity in Receive Pay
($ in millions) Balance Months Rate Rate
Interest Rate Swaps–
Receive Fixed/
Pay Floating . . . . . . $2,300 84 5.7% 1.9%
Interest Rate Swaps–
Receive Floating/
Pay Fixed . . . . . . . . 421 19 1.1% 4.1%
Mortgage Lending
Commitments:
Forward Contracts . 796 2 — —
Interest Rate Lock
Commitments . . 377 1 — —
Mortgage Servicing
Rights Portfolio:
Principal Only Swaps 181 22 — 1.3%
Interest Rate Swaps –
Receive Fixed/Pay
Floating . . . . . 88 125 5.1% 1.1%
Purchased Options 680 3 3.9% —
Other:
Purchased Options . 400 11 4.8% —
Sold Options . . . . . 400 11 4.1% —
The outstanding notional amounts related to commercial
customer contracts were approximately $9.4 billion as of December
31, 2003.