Fifth Third Bank 2003 Annual Report Download - page 36

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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15. Guarantees
The Bancorp has performance obligations upon the occurrence of
certain events under financial guarantees provided in certain contractual
arrangements. These various arrangements are summarized below.
At December 31, 2003, the Bancorp had issued approximately
$4.9 billion of financial and performance standby letters of credit to
guarantee the performance of various customers to third parties.
The maximum amount of credit risk in the event of
nonperformance by these parties is equivalent to the contract
amount and totals $4.9 billion. Upon issuance, the Bancorp
recognizes a liability equivalent to the amount of fees received from
the customer for these standby letter of credit commitments. At
December 31, 2003, the Bancorp maintained a credit loss reserve of
approximately $24 million related to these financial standby letters
of credit. Approximately 81% of the total standby letters of credit
are secured and in the event of nonperformance by the customers,
the Bancorp has rights to the underlying collateral provided
including commercial real estate, physical plant and property,
inventory, receivables, cash and marketable securities.
Through December 31, 2003, the Bancorp had transferred,
subject to credit recourse, certain primarily fixed-rate and short-term
investment grade commercial loans to an unconsolidated QSPE that
is wholly owned by an independent third-party. The outstanding
balance of such loans at December 31, 2003 was approximately
$1.8 billion. These loans may be transferred back to the Bancorp
upon the occurrence of an event specified in the legal documents
that established the QSPE. These events include borrower default
on the loans transferred, bankruptcy preferences initiated against
underlying borrowers and ineligible loans transferred by the
Bancorp to the QSPE. The maximum amount of credit risk in the
event of nonperformance by the underlying borrowers is
approximately equivalent to the total outstanding balance. The
maximum amount of credit risk at December 31, 2003 was $1.8
billion. The outstanding balances are generally secured by the
underlying collateral that include commercial real estate, physical
plant and property, inventory, receivables, cash and marketable
securities. Given the investment grade nature of the loans
transferred as well as the underlying collateral security provided, the
Bancorp has not maintained any loss reserve related to these loans
transferred.
At December 31, 2003, the Bancorp had provided credit
recourse on approximately $559 million of residential mortgage
loans sold to unrelated third parties. In the event of any customer
default, pursuant to the credit recourse provided, the Bancorp is
required to reimburse the third party. The maximum amount of
credit risk in the event of nonperformance by the underlying
borrowers is equivalent to the total outstanding balance of $559
million. In the event of nonperformance, the Bancorp has rights to
the underlying collateral value attached to the loan. Consistent with
its overall approach in estimating credit losses for various categories
of residential mortgage loans held in its loan portfolio, the Bancorp
maintains an estimated credit loss reserve of approximately $14
million relating to these residential mortgage loans sold.
As of December 31, 2003, the Bancorp has also fully and
unconditionally guaranteed $336 million of certain long-term
borrowing obligations issued by two wholly-owned issuing trust
entities that have been deconsolidated upon the early adoption of
the provisions of FIN 46. See Note 1 for further discussion of
adoption of FIN 46.
During 2003, the Bancorp, through its electronic payment
processing division, processed VISA®and MasterCard®merchant
card transactions. Pursuant to VISA®and MasterCard®rules, the
Bancorp assumes certain contingent liabilities relating to these
transactions which typically arise from billing disputes between the
merchant and cardholder that are ultimately resolved in the
cardholder’s favor. In such cases, these transactions are “charged
back” to the merchant and disputed amounts are refunded to the
cardholder. In the event that the Bancorp is unable to collect these
amounts from the merchant, it will bear the loss for refunded
amounts. The likelihood of incurring a contingent liability arising
from chargebacks is relatively low, as most products or services are
delivered when purchased, and credits are issued on returned items.
For the year ended December 31, 2003, the Bancorp processed
approximately $109 million of chargebacks presented by issuing
banks resulting in actual losses to the Bancorp of approximately $4
million. The Bancorp accrues for probable losses based on historical
experience and maintains an estimated credit loss reserve of
approximately $1 million at December 31, 2003.
Fifth Third Securities, Inc (FTS), a subsidiary of the Bancorp,
guarantees the collection of all margin account balances held by its
brokerage clearing agent for the benefit of FTS customers. FTS is
responsible for payment to its brokerage clearing agent for any loss,
liability, damage, cost or expense incurred as a result of customers
failing to comply with margin or margin maintenance calls on all
margin accounts. The margin account balance held by the brokerage
clearing agent as of December 31, 2003 was $51 million. In the
event of any customer default, FTS has rights to the underlying
collateral provided. Given certain FTS margin account
relationships were in place prior to January 1, 2003 and the
existence of the underlying collateral provided as well as the
negligible historical credit losses, FTS does not maintain any loss
reserve.
16. Related Party Transactions
At December 31, 2003 and 2002, certain directors, executive officers,
principal holders of Bancorp common stock and associates of such
persons were indebted, including undrawn commitments to lend, to
the Bancorp’s banking subsidiaries in the aggregate amount, net of
participations, of $385 million and $486 million, respectively. As of
December 31, 2003 and 2002, the outstanding balance on loans to
related parties, net of participations and undrawn commitments, was
$118 million and $160 million, respectively.
Commitments to lend to related parties as of December 31, 2003,
net of participations, were comprised of $364 million in loans and
guarantees for various business and personal interests made to the
Bancorp and subsidiary directors and $21 million to certain executive
officers. This indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the
time of comparable transactions with unrelated parties.
None of the Bancorp’s affiliates, officers, directors or employees
has an interest in or receives any remuneration from any special
purpose entities or qualified special purpose entities with which the
Bancorp transacts business.
17. Nonowner Changes in Equity
The Bancorp has elected to present the disclosures required by SFAS
No. 130, “Reporting Comprehensive Income,” in the Consolidated
Statements of Changes in Shareholders’ Equity on page 19. The
caption “Net Income and Nonowner Changes in Equity” represents
total comprehensive income as defined in the Statement. Disclosure
of the reclassification adjustments, related tax effects allocated to