Fifth Third Bank 2010 Annual Report Download - page 62

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
60 Fifth Third Bancorp
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to
meet changes in loan and lease demand, unexpected deposit
withdrawals and other contractual obligations. Mitigating liquidity
risk is accomplished by maintaining liquid assets in the form of
investment securities, maintaining sufficient unused borrowing
capacity in the debt markets and delivering consistent growth in
core deposits. A summary of certain obligations and commitments
to make future payments under contracts is included in Note 18
of the Notes to Consolidated Financial Statements.
The Bancorp maintains a contingency funding plan that
assesses the liquidity needs under various scenarios of market
conditions, asset growth and credit rating downgrades. The plan
includes liquidity stress testing which measures various sources
and uses of funds under the different scenarios. The contingency
plan provides for ongoing monitoring of unused borrowing
capacity and available sources of contingent liquidity to prepare
for unexpected liquidity needs and to cover unanticipated events
that could affect liquidity.
The Bancorp has approximately $6.8 billion of unsecured
long-term debt outstanding as of December 31, 2010. Long-term
debt with a principal balance of $15 million and a carrying value
of $14 million will mature during 2011.
Sources of Funds
The Bancorp’s primary sources of funds relate to cash flows from
loan and lease repayments, payments from securities related to
sales and maturities, the sale or securitization of loans and leases
and funds generated by core deposits, in addition to the use of
public and private debt offerings.
Projected contractual maturities from loan and lease
repayments are included in Table 44 of the Market Risk
Management section. Of the $15.4 billion of securities in the
available-for-sale portfolio at December 31, 2010, $4.0 billion in
principal and interest is expected to be received in the next 12
months and an additional $2.5 billion is expected to be received in
the next 13 to 24 months. For further information on the
Bancorp’s available-for-sale securities portfolio, see the
Investment Securities section of the MD&A.
Asset-driven liquidity is provided by the Bancorp’s ability to
sell or securitize loan and lease assets. In order to reduce the
exposure to interest rate fluctuations and to manage liquidity, the
Bancorp has developed securitization and sale procedures for
several types of interest-sensitive assets. A majority of the long-
term, fixed-rate single-family residential mortgage loans
underwritten according to FHLMC or FNMA guidelines are sold
for cash upon origination. Additional assets such as jumbo fixed-
rate residential mortgages, certain commercial loans, home equity
lines and loans, automobile loans and other consumer loans are
also capable of being securitized or sold. For the years ended
December 31, 2010 and 2009, loans totaling $18.2 billion and
$21.8 billion, respectively, were sold, securitized or transferred
off-balance sheet. For further information on the transfer of
financial assets, see Note 12 of the Notes to Consolidated
Financial Statements.
Core deposits have historically provided the Bancorp with a
sizeable source of relatively stable and low cost funds. The
Bancorp’s average core deposits and shareholders’ equity funded
80% of its average total assets during 2010 compared to 72%
during 2009. In addition to core deposit funding, the Bancorp also
accesses a variety of other short-term and long-term funding
sources, which include the use of the FHLB system. Certificates
of deposit carrying a balance of $100,000 or more and deposits in
the Bancorp’s foreign branch located in the Cayman Islands are
wholesale funding tools utilized to fund asset growth.
Management does not rely on any one source of liquidity and
manages availability in response to changing balance sheet needs.
The Bancorp previously participated in the FDIC’s TAG
program that was adopted on November 21, 2008 under EESA.
The TAG program provides insurance to any funds held in
qualifying noninterest-bearing transaction accounts without limit.
On April 13, 2010, the FDIC adopted an interim final rule
extending the TAG program for six months, through December
31, 2010, with the possibility of extending the program an
additional twelve months without further rulemaking. As a
participant in the TAG program, the Bancorp was required to
decide whether to opt out of the program on or before April 30,
2010. The Bancorp opted out of the TAG program effective July
1, 2010. After this date, customer accounts that qualified under
the TAG program are no longer guaranteed in full, but are insured
up to $250,000 under the FDIC’s general deposit insurance rules.
The Bancorp has a shelf registration in place with the SEC
permitting ready access to the public debt markets and qualifies as
a “well-known seasoned issuer” under SEC rules. As of December
31, 2010, $8.8 billion of debt or other securities were available for
issuance from this shelf registration under the current Bancorp’s
Board of Directors’ authorizations, however, access to these
markets may depend on market conditions. The Bancorp also has
$19.0 billion of funding available for issuance through private
offerings of debt securities pursuant to its bank note program and
currently has approximately $25.3 billion of borrowing capacity
available through secured borrowing sources including the FHLB
and FRB.
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of 121,428,572 shares of
common stock in an underwriting offering at an initial price of
$14.00 per share. Additionally, on January 25, 2011, the Bancorp
sold $1.0 billion in aggregate principal amount of 3.625% Senior
Notes due January 25, 2016. Note 32 of the Notes to
Consolidated Financial Statements provides additional
information regarding the common equity and senior notes
offerings.
Credit Ratings
The cost and availability of financing to the Bancorp are impacted
by its credit ratings. A downgrade to the Bancorp’s credit ratings
could affect its ability to access the credit markets and increase its
borrowing costs, thereby adversely impacting the Bancorp’s
financial condition and liquidity. Key factors in maintaining high
credit ratings include a stable and diverse earnings stream, strong
TABLE 46: AGENCY RATINGS
A
s of February 28, 2011 Moody’s Standard and Poor’s Fitch DBRS
Fifth Third Bancorp:
Short-term P-2 A-2 F1 R-1L
Senior debt Baa1 BBB A- AL
Subordinated debt Baa2 BBB- BBB+ BBBH
Fifth Third Bank:
Short-term P-2 A-2 F1 R-1L
Long-term deposit A3 No rating A A
Senior debt A3 BBB+ A- A
Subordinated debt Baa1 BBB BBB+ A (low)