Fifth Third Bank 2010 Annual Report Download - page 103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 101
18. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into
financial instruments and various agreements to meet the
financing needs of its customers. The Bancorp also enters into
certain transactions and agreements to manage its interest rate and
prepayment risks, provide funding, equipment and locations for
its operations and invest in its communities. These instruments
and agreements 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. The
creditworthiness of counterparties for all instruments and
agreements is evaluated on a case-by-case basis in accordance with
the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of
the amounts recognized in the Consolidated Balance Sheets are
discussed in further detail as follows:
Commitments
The Bancorp has certain commitments to make future payments
under contracts. The following table reflects a summary of
significant commitments as of December 31:
($ in millions) 2010 2009
Commitments to extend credit $43,677 42,591
Forward contracts to sell mortgage loans 6,389 3,633
Letters of credit 5,516 6,657
Noncancelable lease obligations 869 906
Capital commitments for private equity
investments 193 90
Purchase obligations 64 25
Capital expenditures 48 27
Capital lease obligations 32 44
Commitments to extend credit
Commitments to extend credit are agreements to lend, typically
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 is exposed to credit risk in the
event of nonperformance by the counterparty for the amount of
the contract. Fixed-rate commitments are also subject to market
risk resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those
commitments. As of December 31, 2010 and 2009, the Bancorp
had a reserve for unfunded commitments totaling $227 million
and $294 million, respectively, included in other liabilities in the
Consolidated Balance Sheets.
Forward contracts to sell mortgage loans
The Bancorp enters into forward contracts to economically hedge
the change in fair value of certain residential mortgage loans held
for sale due to changes in interest rates. The outstanding notional
amounts of these forward contracts were $6.4 billion and $3.6
billion as of December 31, 2010 and 2009, respectively.
Letters of credit
Standby and commercial letters of credit are conditional
commitments issued to guarantee the performance of a customer
to a third party and as of December 31, 2010, are summarized by
expiration in the following table:
($ in millions)
Less than 1 year (a) $2,367
1-5 years (a) 2,933
Over 5 years 216
Total $5,516
(a) Includes $67 of less than 1 year and $1 of 1-5 years issued on behalf of commercial
customers to facilitate trade payments in U.S. dollars and foreign currencies.
Standby letters of credit accounted for 99% of total letters of
credit at December 31, 2010 and 2009 and are considered
guarantees in accordance with U.S. GAAP. Approximately 54%
and 58% of the total standby letters of credit were secured as of
December 31, 2010 and 2009, respectively. In the event of
nonperformance by the customers, the Bancorp has rights to the
underlying collateral, which can include commercial real estate,
physical plant and property, inventory, receivables, cash and
marketable securities. At December 31, 2010 and 2009, the
reserve related to these standby letters of credit was $10 million
and $6 million, respectively. The Bancorp monitors the credit risk
associated with letters of credit using the same risk rating system
utilized for establishing loss reserves within its loan and lease
portfolio. Risk ratings as of December 31, 2010 under this risk
rating system are summarized in the following table:
($ in millions)
Pass $4,944
Special mention 193
Substandard 360
Doubtful 17
Loss 2
Total $5,516
At December 31, 2010 and 2009, the Bancorp had outstanding
letters of credit that were supporting certain securities issued as
VRDNs. The Bancorp facilitates financing for its commercial
customers, which consist of companies and municipalities, by
marketing the VRDNs to investors. The VRDNs pay interest to
holders at a rate of interest that fluctuates based upon market
demand. The VRDNs generally have long-term maturity dates,
but can be tendered by the holder for purchase at par value upon
proper advance notice. When the VRDNs are tendered, a
remarketing agent generally finds another investor to purchase the
VRDNs to keep the securities outstanding in the market. As of
December 31, 2010 and 2009, FTS acted as the remarketing agent
to issuers on $3.4 billion of VRDNs. As remarketing agent, FTS is
responsible for finding purchasers for VRDNs that are put by
investors. The Bancorp issues letters of credit, as a credit
enhancement, to the VRDNs remarketed by FTS, in addition to
$563 million and $936 million in VRDNs remarketed by third
parties at December 31, 2010 and 2009, respectively. These letters
of credit are included in the total letters of credit balance provided
in the previous table. At December 31, 2010 and 2009, FTS held
$1 million and $47 million, respectively, of these VRDNs in its
portfolio and classified them as trading securities. At December
31, 2010 and 2009 the Bancorp held $105 million and $188
million, respectively, of VRDNs which were purchased from the
market, through FTS and held in its trading securities portfolio.
For the VRDNs remarketed by third parties, in some cases, the
remarketing agent has failed to remarket the securities and has
instructed the indenture trustee to draw upon $11 million and $45
million of letters of credit issued by the Bancorp at December 31,
2010 and 2009, respectively. The Bancorp recorded these draws as
commercial loans in its Consolidated Balance Sheets.