Fifth Third Bank 2010 Annual Report Download - page 121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 119
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, 2010, derivatives classified as Level 3, which are valued using
an option-pricing model containing unobservable inputs, consisted
primarily of warrants and put rights associated with the Processing
Business Sale and a total return swap associated with the
Bancorp’s sale of Visa, Inc. Class B shares. Level 3 derivatives also
include interest rate lock commitments, which utilize internally
generated loan closing rate assumptions as a significant
unobservable input in the valuation process.
In connection with the Processing Business Sale, the Bancorp
provided Advent International with certain put options that are
exercisable in the event of certain circumstances. In addition, the
warrants associated with the Processing Business Sale allow the
Bancorp to purchase an incremental 10% nonvoting interest in
FTPS under certain defined conditions involving change of
control. The fair values of the warrants and put options are
calculated applying Black-Scholes option valuation models using
probability weighted scenarios.
The assumptions utilized in the models are summarized in the following table as of December 31:
2010 2009
Warrants Put Options Warrants Put Options
Expected term 8.5 - 18.5 years .5 - 3.0 years 9.5 - 19.5 years .5 - 4.0 years
Expected volatility (a) 36.0 - 37.0% 25.6 - 44.6% 36.7 - 41.1% 31.3 - 50.2%
Risk free rate 3.06 - 4.18% 0.23 - 1.05% 3.96 - 4.68% 0.27 - 2.23%
Expected dividend rate 0% 0% 0% 0%
(a) Based on historical and implied volatilities of comparable companies assuming similar expected terms.
Under the terms of the total return swap, the Bancorp will make
or receive payments based on subsequent changes in the
conversion rate of the Visa Class B shares into Class A shares. The
fair value of the total return swap was calculated using a DCF
model based on unobservable inputs consisting of management’s
estimate of the probability of certain litigation scenarios, timing of
litigation settlements and payments related to the swap.
The net fair value of the interest rate lock commitments at
December 31, 2010 was immaterial to the Bancorp. At December
31, 2010, 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 $14 million and $27 million,
respectively. Immediate increases of current interest rates of 25 bp
and 50 bp would result in decreases in the fair value of the interest
rate lock commitments of $16 million and $33 million,
respectively, at December 31, 2010. The change in fair value of
interest rate lock commitments at December 31, 2010 due to
immediate 10% and 20% favorable and adverse changes in the
assumed loan closing rates would be immaterial to the Bancorp.
These sensitivities are hypothetical and should be used with
caution, as changes in fair value based on a variation in
assumptions typically cannot be extrapolated because the
relationship of the change in assumptions to the change in fair
value may not be linear.
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2010
($ in millions)
Residual
Interests in
Securitizations
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net (a)
Equity
Derivatives,
Net (a)
Total
Fair Value
Beginning balance $174 13 26 (2) 11 $222
Total gains or losses (realized/unrealized):
Included in earnings - 3 - 187 (14) 176
Included in other comprehensive income - - - - - -
Purchases, sales, issuances and settlements, net (174)
(b) (10) (6) (183) 56 (317)
Transfers in and/or out of Level 3 (c) - 26 - - 26
Ending balance $ - 6 46 2 53 $107
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, 2010 (d) $ - - -
60 (14) $46
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2009 ($ in millions)
Residual
Interests in
Securitizations
Trading
Securities
Residential
Mortgage
Loans
Derivatives,
Net (e)
Total
Fair Value
Beginning balance $146 - 7 24 $177
Total gains or losses (realized/unrealized):
Included in earnings 10 (4) (2) 145 149
Included in other comprehensive income 3 - - - 3
Purchases, sales, issuances and settlements, net 15 17 (8) (160) (136)
Transfers in and/or out of Level 3 (c) - 29 - 29
Ending balance $174 13 26 9 $222
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, 2009 (d) $6 (4) (2) 16 $16