Fifth Third Bank 2010 Annual Report Download - page 99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 97
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer
accommodation are summarized in the following table:
For the year ended December 31, ($ in millions)
Consolidated Statements of
Income Caption 2010 2009 2008
Interest rate contracts:
Interest rate contracts for customers (contract revenue) Corporate banking revenue $26 21 50
Interest rate contracts for customers (credit losses) Other noninterest expense (22) (33) (5)
Interest rate contracts for customers (credit component of fair value
adjustment) Other noninterest expense (1) (7) (27)
Interest rate lock commitments Mortgage banking net revenue 187 129 54
Commodity contracts:
Commodity contracts for customers (contract revenue) Corporate banking revenue 8 6 7
Commodity contracts for customers (credit component of fair value
adjustment) Other noninterest expense - 2 (3)
Foreign exchange contracts:
Foreign exchange contracts for customers (contract revenue) Corporate banking revenue 63 76 106
Foreign exchange contracts for customers (credit component of fair
value adjustment) Other noninterest expense (1) 2 (7)
15. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions) 2010 2009
Derivative instruments $2,074 1,733
Bank owned life insurance 1,715 1,763
Partnership investments 1,367 1,179
A
ccounts receivable and drafts-in-process 1,023 892
OREO and other repossessed personal property 532 312
Investment in FTPS Holding, LLC 522 521
A
ccrued interest receivable 413 417
Prepaid expenses 133 282
Deferred tax asset 13 26
Income tax receivable 198
Other 607 328
Total $8,400 7,551
The Bancorp incorporates the utilization of derivative instruments
as part of its overall risk management strategy to reduce certain
risks related to interest rate, prepayment and foreign currency
volatility. The Bancorp also holds derivatives instruments for the
benefit of its commercial customers. For further information on
derivative instruments, see Note 14.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. Therefore, the
Bancorp’s BOLI policies are intended to be long-term investments
to provide funding for future payment of long-term liabilities. The
Bancorp records these BOLI policies within other assets in the
Consolidated Balance Sheets at each policy’s respective cash
surrender value, with changes recognized in other noninterest
income in the Consolidated Statements of Income.
Certain BOLI policies have a stable value agreement through
either a large, well-rated bank or multi-national insurance carrier
that provides limited cash surrender value protection from declines
in the value of each policy’s underlying investments. During 2008
and 2009, the value of the investments underlying one of the
Bancorp’s BOLI policies continued to decline due to disruptions in
the credit markets, widening of credit spreads between U.S.
treasuries/swaps versus municipal bonds and bank trust preferred
securities, and illiquidity in the asset-backed securities market.
These factors caused the cash surrender value to decline further
beyond the protection provided by the stable value agreement. As a
result of exceeding the cash surrender value protection, the
Bancorp recorded charges totaling $10 million and $215 million
during 2009 and 2008, respectively, to reflect declines in the
policy’s cash surrender value. The cash surrender value of this
BOLI policy was $237 million at December 31, 2009.
During 2009, the Bancorp notified the related insurance
carrier of its intent to surrender this BOLI policy. Due to the fact
the Bancorp had not yet decided the manner in which it would
surrender the policy, which may have impacted the cash surrender
value protection, and because of ongoing developments in
litigation with the insurance carrier, the Bancorp recognized
charges of $43 million in 2009 to fully reserve for the potential loss
of the cash surrender value protection associated with the policy.
In addition, the Bancorp recognized tax benefits of $106 million in
2009 related to losses recorded in prior periods on this policy that
are now expected to be tax deductible.
During 2010, an agreement to settle the claims with the
insurance carrier was reached among the parties to the litigation.
As a result of this settlement and the corresponding receipt of
settlement proceeds from the insurance carrier in the third quarter
of 2010, the Bancorp recorded $152 million in other noninterest
income and $25 million associated with legal fees related to the
settlement in other noninterest expense in the Bancorp’s
Consolidated Statements of Income.
CDC, a partnership investment and wholly owned subsidiary
of the Bancorp, was created to invest in projects to create
affordable housing, revitalize business and residential areas, and
preserve historic landmarks. The Bancorp has determined that
these entities are VIEs and the Bancorp’s investments represent
variable interests. See Note 12 for further information.
On June 30, 2009, the Bancorp sold an approximate 51%
interest in its Processing Business to Advent International. The
resulting new company was named FTPS Holding, LLC. The
Bancorp’s remaining approximate 49% ownership in FTPS is
accounted for under the equity method of accounting.