Fifth Third Bank 2010 Annual Report Download - page 111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 109
The following is a description of the valuation methodologies
used for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
Equity securities
The plan measures common stock using quoted prices which are
available in an active market and classifies these investments
within Level 1 of the valuation hierarchy.
Mutual and exchange traded funds
All of the plan’s mutual and exchange traded funds are publicly
traded. The plan measures the value of these investments using
the fund’s quoted prices that are available in an active market and
classifies these investments within Level 1 of the valuation
hierarchy.
Debt securities
For certain U.S. Treasury and federal agency and non-agency
obligations, the plan measures the fair value based on quoted
prices, which are available in an active market and classifies these
investments within Level 1 of the valuation hierarchy. Where
quoted prices are not available, the plan measures the fair value of
these investments based on matrix pricing models that include the
bid price, which factors in the yield curve and other characteristics
of the security including the interest rate, prepayment speeds and
length of maturity. Therefore, these investments are classified
within Level 2 of the valuation hierarchy.
Plan Assumptions
The plan assumptions are evaluated annually and are updated as
necessary. The discount rate assumption reflects the yield on a
portfolio of high quality fixed-income instruments that have a
similar duration to the plan’s liabilities. The expected long-term
rate of return assumption reflects the average return expected on
the assets invested to provide for the plan’s liabilities. In
determining the expected long-term rate of return, the Bancorp
evaluated actuarial and economic inputs, including long-term
inflation rate assumptions and broad equity and bond indices
long-term return projections, as well as actual long-term historical
plan performance.
The following table summarizes the plan assumptions for
the years ended December 31:
Lowering both the expected rate of return on the plan and the
discount rate by 0.25% would have increased the 2010 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp does not
expect to contribute to the plan in 2011. Estimated pension
benefit payments, which reflect expected future service, are $19
million in 2011, $20 million in 2012, $17 million in 2013, $17
million in 2014 and $16 million in 2015. The total estimated
payments for the years 2016 through 2020 is $70 million.
Investment Policies and Strategies
The Bancorp’s policy for the investment of plan assets is to
employ investment strategies that achieve a range of weighted-
average target asset allocations relating to equity securities
(including the Bancorp’s common stock), fixed income securities
(including federal agency obligations, corporate bonds and notes)
and cash.
The following table provides the Bancorp’s targeted and
actual weighted-average asset allocations by asset category for
years ended December 31:
W
eighted-average asset
allocation
Targeted
range 2010 2009
Equity securities 72% 71
Bancorp common stock 2 2
Total equity securities (a) 70 – 80% 74 73
Total fixed income securities 20 – 25 23 24
Cash 0 - 5 33
Total 100% 100
(a) Includes mutual and exchange traded funds.
The risk tolerance for the plan is determined by management
to be “moderate to aggressive”, recognizing that higher returns
involve some volatility and that periodic declines in the portfolio’s
value are tolerated in an effort to achieve real capital growth.
There were no significant concentrations of risk associated with
the investments of the Bancorp’s benefit and retirement plans at
December 31, 2010 and 2009.
Permitted asset classes of the plan include cash and cash
equivalents, fixed income (domestic and non-U.S. bonds), equities
(U.S., non-U.S., emerging markets and REITS), equipment leasing
precious metals, commodity transactions and mortgages. The plan
utilizes derivative instruments including puts, calls, straddles or
other option strategies, as approved by management.
Prohibited asset classes of the plan include venture capital,
short sales, limited partnerships and leveraged transactions. Per
ERISA, the Bancorp’s common stock cannot exceed ten percent
of the fair value of plan assets.
Fifth Third Bank, as Trustee, is expected to manage the plan
assets in a manner consistent with the plan agreement and other
regulatory, federal and state laws. The Fifth Third Bank Pension,
Profit Sharing and Medical Plan Committee (the “Committee”) is
the plan administrator. The Trustee is required to provide to the
Committee monthly and quarterly reports covering a list of plan
assets, portfolio performance, transactions and asset allocation.
The Trustee is also required to keep the Committee apprised of
any material changes in the Trustee’s outlook and recommended
investment policy.
Other Information on Retirement and Benefit Plans
The accumulated benefit obligation for all defined benefit plans
was $227 million and $217 million at December 31, 2010 and
2009, respectively. Amounts relating to the Bancorp’s defined
benefit plans with assets exceeding benefit obligations were as
follows at December 31:
($ in millions) 2010 2009
Projected benefit obligation $193 -
A
ccumulated benefit obligation 193 -
Fair value of plan assets 197 -
Amounts relating to the Bancorp’s defined benefit plans with
benefit obligations exceeding assets were as follows at December
31:
($ in millions) 2010 2009
Projected benefit obligation $34 217
A
ccumulated benefit obligation 34 217
Fair value of plan assets - 182
As of December 31, 2010 and 2009, $172 million and $160
million, respectively, of plan assets were managed through mutual
funds by Fifth Third Bank, a subsidiary of the Bancorp. Plan
assets included $5 million and $3 million of Bancorp common
stock as of December 31, 2010 and 2009, respectively. Plan assets
are not expected to be returned to the Bancorp during 2011.
W
eighted-average assumptions 2010 2009 2008
For measuring benefit obligations
at year end:
Discount rate 5.39 % 5.88 6.11
Rate of compensation increase 5.00 5.00 5.00
Expected return on plan assets 8.25 8.50 8.53
For measuring net periodic benefit cost:
Discount rate 5.88 6.11 6.45
Rate of compensation increase 5.00 5.00 5.00
Expected return on plan assets 8.25 8.50 8.50