Fifth Third Bank 2008 Annual Report Download - page 96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
94 Fifth Third Bancorp
Residential mortgage loans held for sale
For residential mortgage loans held for sale, fair value is estimated
based upon mortgage-backed securities prices and spreads to
those prices or, for certain assets, discounted cash flow models
that may incorporate the anticipated portfolio composition, credit
spreads of asset-backed securities with similar collateral, and
market conditions. Residential mortgage loans held for sale are
classified within Level 2 of the valuation hierarchy. For
residential mortgage loans reclassified from held for sale to held
for investment, the fair value estimation is based primarily on the
underlying collateral values. Therefore, these loans are classified
within Level 3 of the valuation hierarchy.
Derivatives
Exchange-traded derivatives valued using quoted prices are
classified within Level 1 of the valuation hierarchy. However, few
classes of derivative contracts are listed on an exchange. Most
derivative contracts are valued using discounted cash flow or
other models that incorporate current market interest rates, credit
spreads assigned to the derivative counterparties, and other
market parameters. The majority of the Bancorp's derivative
positions are valued utilizing models that use as their basis readily
observable market parameters and are classified within Level 2 of
the valuation hierarchy. Such derivatives include basic and
structured interest rate swaps and options. Derivatives that are
valued based upon models with significant unobservable market
parameters are classified within Level 3 of the valuation hierarchy.
At December 31, 2008, derivatives classified as Level 3 consisted
primarily of interest rate lock commitments, which utilize
internally generated loan closing rate assumptions as a significant
unobservable input in the valuation process. The net fair value of
the interest rate lock commitments was $22 million at December
31, 2008. At December 31, 2008, immediate decreases in current
interest rates of 25 bp and 50 bp would result in increases in the
fair value of the interest rate lock commitments of approximately
$12 million and $20 million, respectively. Immediate increases of
current interest rates of 25bp and 50 bp would result in decreases
in the fair value of the interest rate lock commitments of
approximately $16 million and $37 million, respectively. The
change in fair value of interest rate lock commitments at
December 31, 2008 due to immediate 10% and 20% adverse
changes in the assumed loan closing rates would be
approximately $2 million and $4 million respectively, and due to
immediate 10% and 20% favorable changes in the assumed loan
closing rates would be approximately $2 million and $4 million,
respectively. These sensitivities are hypothetical and should be
used with caution, as changes in fair value based on a variation in
assumptions typically cannot be extrapolated because the
relationship of the change in assumptions to the change in fair
value may not be linear.
The following table is a reconciliation of all assets and
liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the year ended
December 31, 2008:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
($ in millions)
Available-for-
Sale Securities
Residential
Mortgage
Loans
Derivatives, Net
(a)
Total
Fair Value
Beginning balance $10 - (4) $6
Total gains or losses (realized/unrealized):
Included in earnings (15) (1) 54 38
Included in other comprehensive income 1 - - 1
Purchases, sales, issuances and settlements, net 150 - (26) 124
Transfers in and/or out of Level 3 (b) - 8 - 8
Ending balance $146 7 24 $177
The amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains or losses relating to assets still
held at December 31, 2008 (c) ($15) (1) 27 $11
(a) Net derivatives include derivative assets and liabilities of $30 million and $6 million, respectively, at December 31, 2008, and derivative assets and liabilities o
f
$9 million and $13 million, respectively, at January 1, 2008.
(b) Includes residential mortgage loans held for sale that were transferred to held for investment.
(c) Includes interest income and expense.
The total gains and losses included in earnings for the year ended December 31, 2008 for assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) were recorded in the Consolidated Statements of Income as follows:
($ in millions) Gains (Losses)
Interest income $7
Corporate banking revenue (4)
Mortgage banking net revenue 53
Other noninterest income 5
Securities losses, net (23)
Total gains $38
The total gains and losses included in earnings for the year ended December 31, 2008 attributable to changes in unrealized gains and losses
related to Level 3 assets and liabilities still held at December 31, 2008 were recorded in the Consolidated Statements of Income as follows:
($ in millions) Gains (Losses)
Interest income $7
Corporate banking revenue 1
Mortgage banking net revenue 21
Other noninterest income 5
Securities losses, net (23)
Total gains $11