Fifth Third Bank 2013 Annual Report Download - page 127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
125 Fifth Third Bancorp
component of mortgage banking net revenue in the Consolidated
Statements of Income.
Additionally, as part of the Bancorp’s overall risk management
strategy with respect to minimizing significant fluctuations in
earnings and cash flows caused by interest rate and prepayment
volatility, the Bancorp may enter into free-standing derivative
instruments (options, swaptions and interest rate swaps). The gains
and losses on these derivative contracts are recorded within other
noninterest income in the Consolidated Statements of Income.
In conjunction with the initial sale of the Bancorp’s 51%
interest in Vantiv Holding, LLC, the Bancorp received a warrant
and issued a put option, which are accounted for as free-standing
derivatives. The put option expired as a result of the Vantiv, Inc.
initial public offering in March of 2012. Refer to Note 27 for further
discussion of significant inputs and assumptions used in the
valuation of the warrant.
In conjunction with the sale of Visa, Inc. Class B shares in
2009, the Bancorp entered into a total return swap in which the
Bancorp will make or receive payments based on subsequent
changes in the conversion rate of the Class B shares into Class A
shares. This total return swap is accounted for as a free-standing
derivative. See Note 27 for further discussion of significant inputs
and assumptions used in the valuation of this instrument.
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for ris
k
management and other business purposes are summarized in the following table:
Consolidated Statements of Income
Caption For the year ended December 31 ($ in millions) 2013 2012 2011
Interest rate contracts:
Forward contracts related to mortgage loans held for sale Mortgage banking net revenue $ 24 28 (128)
Interest rate contracts related to MSR portfolio Mortgage banking net revenue (30) 63 345
Interest rate swaps related to long-term debt Other noninterest income - 2 7
Foreign exchange contracts:
Foreign exchange contracts for risk management purposes Other noninterest income 5 - -
Equity contracts:
Stock warrant associated with Vantiv Holding, LLC Other noninterest income 206 66 32
Put option associated with Vantiv Holding, LLC Other noninterest income - 1 7
Swap associated with sale of Visa, Inc. Class B shares Other noninterest income (31) (45) (83)
Free-Standing Derivative Instruments – Customer
Accommodation
The majority of the free-standing derivative instruments the
Bancorp enters into are for the benefit of its commercial customers.
These derivative contracts are not designated against specific assets
or liabilities on the Bancorp’s Consolidated Balance Sheets 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 commodity contracts to hedge such items
as natural gas and various other derivative contracts. The Bancorp
may economically hedge significant exposures related to these
derivative contracts entered into for the benefit of customers by
entering into offsetting contracts with approved, reputable,
independent counterparties with substantially matching terms. The
Bancorp hedges its interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue in the Consolidated Statements of Income.
The Bancorp enters into risk participation agreements, under
which the Bancorp assumes credit exposure relating to certain
underlying interest rate derivative contracts. The Bancorp only
enters into these risk participation agreements in instances in which
the Bancorp has participated in the loan that the underlying interest
rate derivative contract was designed to hedge. The Bancorp will
make payments under these agreements if a customer defaults on its
obligation to perform under the terms of the underlying interest rate
derivative contract. As of December 31, 2013 and 2012, the total
notional amount of the risk participation agreements was $1.2
billion and $1.0 billion, respectively, and the fair value was a liability
of $3 million at December 31, 2013 and $2 million at December 31,
2012, which is included in interest rate contracts for customers. As
of December 31, 2013, the risk participation agreements had an
average remaining life of 3.0 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
A
t December 31 ($ in millions) 2013 2012
Pass $ 1,153 993
Special mention 38 -
Substandard 12 13
Total $ 1,203 1,006