MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Goodwill Derivatives  Valuation techniques and parameters used for measuring  assets and liabilities are reviewed and validated by the Bancorp on  a quarterly basis. Additionally, the Bancorp monitors the fair  values of significant assets and liabilities using a variety of  methods including the evaluation of pricing runs and exception  Exchange-traded derivatives valued using quoted prices  and certain over-the-counter derivatives valued using  active bids are classified within Level 1 of the valuation  hierarchy. Most of the Bancorp’s 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 and, therefore, 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, 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 its 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.  Residential mortgage loans held for sale and held  for investment  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 ARM loans,  discounted cash flow models that may incorporate the  anticipated portfolio composition, credit spreads of  asset-backed securities with similar collateral, and market  conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount  rates due to loan characteristics such as the state in  which the loan was originated, the loan amount and the  ARM margin. Residential mortgage loans held for sale  that are valued based on mortgage-backed securities  prices are classified within Level 2 of the valuation  hierarchy as the valuation is based on external pricing  for similar instruments. ARM loans classified as held for  sale are also classified within Level 2 of the valuation  hierarchy due to the use of observable inputs in the  discounted cash flow model. These observable inputs  include interest rate spreads from agency mortgage- backed securities market rates and observable discount  rates. 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.  31, 2010, the Bancorp measured fair value using a  discount rate based on the assumed holding period.  reports based on certain analytical criteria, comparison to previous  trades and overall review and assessments for reasonableness.  In addition to the assets and liabilities measured at fair value  on a recurring basis, the Bancorp measures servicing rights,  certain loans and long-lived assets at fair value on a nonrecurring  basis. Refer to Note 28 of the Notes to Consolidated Financial  Statements for further information on fair value measurements. Business combinations entered into by the Bancorp typically  include the acquisition of goodwill. U.S. GAAP requires goodwill  to be tested for impairment at the Bancorp’s reporting unit level  on an annual basis, which for the Bancorp is September 30, and  more frequently if events or circumstances indicate that there may  be impairment. The Bancorp has determined that its segments  qualify as reporting units under U.S. GAAP. Impairment exists  when a reporting unit’s carrying amount of goodwill exceeds its  implied fair value, which is determined through a two-step  impairment test. The first step (Step 1) compares the fair value of  a reporting unit with its carrying amount, including goodwill. If  the carrying amount of the reporting unit exceeds its fair value,  the second step (Step 2) of the goodwill impairment test is  performed to measure the impairment loss amount, if any.  The fair value of a reporting unit is the price that would be  received to sell the unit as a whole in an orderly transaction  between market participants at the measurement date. Since none  of the Bancorp’s reporting units are publicly traded, individual  reporting unit fair value determinations cannot be directly  correlated to the Bancorp’s stock price. To determine the fair  value of a reporting unit, the Bancorp employs an income-based  approach, utilizing the reporting unit’s forecasted cash flows  (including a terminal value approach to estimate cash flows  beyond the final year of the forecast) and the reporting unit’s  estimated cost of equity as the discount rate. Additionally, the  Bancorp determines its market capitalization based on the average  of the closing price of the Bancorp's stock during the month  including the measurement date, incorporating an additional  control premium, and allocates this market-based fair value  measurement to the Bancorp's reporting units in order to  corroborate the results of the income approach. When required to perform Step 2, the Bancorp compares the  implied fair value of a reporting unit’s goodwill with the carrying  amount of that goodwill. If the carrying amount exceeds the  implied fair value, an impairment loss equal to that excess amount  is recognized. An impairment loss recognized cannot exceed the  carrying amount of that goodwill and cannot be reversed even if  the fair value of the reporting unit recovers.  During Step 2, the Bancorp determines the implied fair value  of goodwill for a reporting unit by assigning the fair value of the  reporting unit to all of the assets and liabilities of that unit  (including any unrecognized intangible assets) as if the reporting  unit had been acquired in a business combination. The excess of  the fair value of the reporting unit over the amounts assigned to  its assets and liabilities is the implied fair value of goodwill. This  assignment process is only performed for purposes of testing  goodwill for impairment. The Bancorp does not adjust the  carrying values of recognized assets or liabilities (other than  goodwill, if appropriate), nor recognize previously unrecognized  intangible assets in the Consolidated Financial Statements as a  result of this assignment process. Refer to Note 10 of the Notes  to Consolidated Financial Statements for further information  regarding the Bancorp’s goodwill.  22 Fifth Third Bancorp