Fifth Third Bank 2003 Annual Report Download - page 34

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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The Mandatorily Redeemable Securities due 2031 relate to an
obligation of an indirect wholly-owned subsidiary of the Bancorp.
Upon the adoption of SFAS No. 150 on July 1, 2003, the Bancorp
reclassified its previous minority interest obligation to long-term
borrowings due to the existence of a mandatory redemption feature.
See Note 12 for further discussion of this obligation.
At December 31, 2003, Federal Home Loan Bank advances
have rates ranging from .97% to 8.34%, with interest payable
monthly. The advances were secured by certain residential
mortgage loans and securities totaling $8.3 billion. The advances
mature as follows: $204 million in 2004, $511 million in 2005,
$111 million in 2006, $1,844 million in 2007, $2,424 million in
2008 and thereafter.
At December 31, 2003, securities sold under agreements to
repurchase have rates ranging from 5.08% to 7.26%, with interest
payable monthly. The repurchase agreements mature as follows:
$25 million in 2004 and $800 million in 2008 and thereafter.
The floating rate commercial paper backed obligations are
rolling in nature and mature through 2005 and were recognized as a
result of the early adoption of FIN 46 and related consolidation of
an unrelated SPE involved in the sale and subsequent leaseback of
certain automobile operating lease assets with the Bancorp. See Note
1 for further discussion of adoption of FIN 46.
Medium-term senior notes and subordinated bank notes with
maturities ranging from one year to 30 years can be issued by two
subsidiary banks, of which $497 million was outstanding at December
31, 2003. There were no other medium-term senior notes outstanding
on either of the two subsidiary banks as of December 31, 2003.
During January 2004, a subsidiary of the Bancorp issued a total of
$1.1 billion of medium-term bank notes with maturities ranging from
18 months to 3 years.
12. Minority Interest
During 2001, a subsidiary of the Bancorp issued $425 million of
preferred stock through a private placement. The preferred stock
qualified as Tier 1 capital for regulatory capital purposes. The
preferred stock will be exchanged for trust preferred securities in
2031. The Bancorp has the ability to exchange the preferred stock
for trust preferred securities or cash prior to 2031, subject to
regulatory approval, beginning five years from the date of issuance,
upon a change in the Bancorp’s long-term debt credit rating to BBB
or below, upon the investor changing tax elections or upon a change
in applicable tax law. Through June 30, 2003, annual dividend
returns to the preferred stock holder were reflected as minority
interest expense in the Consolidated Statements of Income.
Adoption of SFAS No. 150 on July 1, 2003 resulted in the
reclassification of the preferred stock to long-term debt and its
corresponding minority interest expense to interest expense. The
preferred stock continues to qualify as Tier 1 capital for regulatory
capital purposes. See Note 1 for further discussion of adoption of
SFAS No. 150.
13. Commitments and Contingent Liabilities
The Bancorp, in the normal course of business, uses derivatives to
manage its interest rate risks and prepayment risks and to meet the
financing needs of its customers. These financial instruments
primarily include commitments to extend credit, standby and
commercial letters of credit, foreign exchange contracts, commitments
to sell residential mortgage loans, interest rate swap agreements,
interest rate floors and caps, principal only swaps, purchased and
sold options and interest rate lock commitments. These instruments
involve, to varying degrees, elements of credit risk, counterparty risk
and market risk in excess of the amounts recognized in the Bancorp’s
Consolidated Balance Sheets. As of December 31, 2003, 100% of
the Bancorp’s non-customer related counterparty derivatives
exposure was to investment grade companies. The contract or
notional amounts of these instruments reflect the extent of
involvement the Bancorp has in particular classes of financial
instruments.
Creditworthiness for all instruments is evaluated on a case-by-
case basis in accordance with the Bancorp’s credit policies. Collateral,
if deemed necessary, is based on management’s credit evaluation of
the counterparty and may include business assets of commercial
borrowers, as well as personal property and real estate of individual
borrowers and guarantors.
A summary of significant commitments and other financial
instruments at December 31:
Contract or
Notional Amount
($ in millions) 2003 2002
Commitments to extend credit . . . . . . . . . . $25,406 21,667
Letters of credit (including
standby letters of credit) . . . . . . . . . . . . 4,908 4,015
Foreign exchange contracts:
Spots –
Commitments to buy. . . . . . . . . . . . . 66 133
Commitments to sell . . . . . . . . . . . . . 75 100
Forwards –
Commitments to buy. . . . . . . . . . . . . 1,957 1,133
Commitments to sell . . . . . . . . . . . . . 1,993 1,157
Options –
Commitments to buy. . . . . . . . . . . . . 240 121
Commitments to sell . . . . . . . . . . . . . 240 121
Commitments to sell
residential mortgage loans . . . . . . . . . . . 796 2,543
Interest rate swap agreements . . . . . . . . . . 7,280 4,824
Interest rate floors . . . . . . . . . . . . . . . . . . 24 46
Interest rate caps . . . . . . . . . . . . . . . . . . . 376 201
Principal only swaps. . . . . . . . . . . . . . . . . 181 386
Purchased options . . . . . . . . . . . . . . . . . . 1,080 1,491
Options sold . . . . . . . . . . . . . . . . . . . . . . 400 —
Interest rate lock commitments. . . . . . . . . 377 1,200
Commitments to extend credit are agreements to lend, generally
having fixed expiration dates or other termination clauses that may
require payment of a fee. Since many of the commitments to extend
credit may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash flow requirements.
The Bancorp’s exposure to credit risk in the event of nonperformance
by the other party is the contract amount. Fixed-rate commitments
are subject to market risk resulting from fluctuations in interest rates
and the Bancorp’s exposure is limited to the replacement value of
those commitments.
Standby and commercial letters of credit are conditional
commitments issued to guarantee the performance of a customer to
a third party. At December 31, 2003, approximately $1,822 million
of standby letters of credit expire within one year, $2,855 million
expire between one to five years and $197 million expire thereafter.
At December 31, 2003, letters of credit of approximately $34
million were issued to commercial customers for a duration of one
year or less to facilitate trade payments in domestic and foreign
currency transactions. The amount of credit risk involved in
issuing letters of credit in the event of nonperformance by the other