Fair value of risk participation agreements

[Table of Contents](#iafeb83384c73449bb49e90c3c5b8201e_7)  


|  |  |  |
| --- | --- | --- |
|  |  |  |
| Fifth Third Bancorp and SubsidiariesNotes to Condensed Consolidated Financial Statements (unaudited) |

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 commercial banking revenue or other noninterest income in the Condensed 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. The total notional amount of the risk participation agreements was $3.7 billion and $3.8 billion at June 30, 2022 and December 31, 2021, respectively, and the fair value was a liability of $8 million at both June 30, 2022 and December 31, 2021 which is included in other liabilities in the Condensed Consolidated Balance Sheets. As of June 30, 2022, the risk participation agreements had a weighted-average remaining life of 3.3 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 as of:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
| ($ in millions) | June 30,2022 | December 31,2021 |
| Pass | $ | 3,687  |  | 3,733  |  |
| Special mention | —  |  | 13  |  |
| Substandard | 34  |  | 34  |  |
| Total | $ | 3,721  |  | 3,780  |  |

  
The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Condensed ConsolidatedStatements of Income Caption | For the three months endedJune 30, |  | For the six months endedJune 30, |
| ($ in millions) | 2022 | 2021 |  | 2022 | 2021 |
| Interest rate contracts: |  |  |  |  |  |  |
| Interest rate contracts for customers (contract revenue) | Commercial banking revenue | $ | 10  |  | 12  |  |  | 26  |  | 19  |  |
|  |  |  |  |  |  |  |
| Interest rate contracts for customers (credit portion of fair value adjustment) | Other noninterest expense | 3  |  | 1  |  |  | 9  |  | 16  |  |
| Interest rate lock commitments | Mortgage banking net revenue | 11  |  | 57  |  |  | 11  |  | 89  |  |
| Commodity contracts: |  |  |  |  |  |  |
| Commodity contracts for customers (contract revenue) | Commercial banking revenue | 9  |  | 6  |  |  | 18  |  | 11  |  |
| Commodity contracts for customers (credit portion of fair value adjustment) | Other noninterest expense | (1) |  | (1) |  |  | (2) |  | —  |  |
|  |  |  |  |  |  |  |
| Foreign exchange contracts: |  |  |  |  |  |  |
| Foreign exchange contracts for customers (contract revenue) | Commercial banking revenue | 20  |  | 16  |  |  | 36  |  | 30  |  |
| Foreign exchange contracts for customers (contract revenue) | Other noninterest income | 8  |  | (2) |  |  | 10  |  | (1) |  |
| Foreign exchange contracts for customers (credit portion of fair value adjustment) | Other noninterest expense | (2) |  | —  |  |  | (2) |  | —  |  |

  
Offsetting Derivative Financial InstrumentsThe Bancorp’s derivative transactions are generally governed by ISDA Master Agreements and similar arrangements, which include provisions governing the setoff of assets and liabilities between the parties. When the Bancorp has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff, including the collateral received as well as eligible offsetting 104
