Fifth Third Bank 2011 Annual Report Download - page 119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 117
17. 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 below:
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) 2011 2010
Commitments to extend credit $ 47,719 43,677
Forward contracts to sell mortgage loans 5,705 6,389
Letters of credit 4,744 5,516
Noncancelable lease obligations 851 869
Capital commitments for private equity investments 166 193
Purchase obligations 115 64
Capital expenditures 41 48
Capital lease obligations 26 32
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, 2011 and 2010, the Bancorp had a reserve for
unfunded commitments totaling $181 million and $227 million,
respectively, included in other liabilities in the Consolidated Balance
Sheets. The Bancorp monitors the credit risk associated with
commitments to extend credit using the same risk rating system
utilized within its loan and lease portfolio. Risk ratings under this
risk rating system are summarized in the following table as of
December 31:
($ in millions) 2011 2010
Pass $ 46,825 42,326
Special mention 480 556
Substandard 403 758
Doubtful 11 37
Total $ 47,719 43,677
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
expire as summarized in the following table as of December 31, 2011:
($ in millions)
Less than 1 year(a) $ 1,940
1 - 5 years(a) 2,665
Over 5 years 139
Total $ 4,744
(a) Includes $75 and $3 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than one year and between one and five years,
respectively.
Standby letters of credit accounted for 98% of total letters of credit
at December 31, 2011 compared to 99% at December 31, 2010 and
are considered guarantees in accordance with U.S. GAAP.
Approximately 54% of the total standby letters of credit were fully
secured as of December 31, 2011 and 2010. 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, 2011 and 2010 the reserve
related to these standby letters of credit was $5 million and $10
million, respectively, included in other liabilities in the Consolidated
Balance Sheets. The Bancorp monitors the credit risk associated
with letters of credit using the same risk rating system utilized within
its loan and lease portfolio.