Fifth Third Bank 2012 Annual Report Download - page 114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
112 Fifth Third Bancorp
Private Equity Investments
The Bancorp invests as a limited partner in private equity funds
which provide the Bancorp an opportunity to obtain higher rates of
return on invested capital, while also creating cross-selling
opportunities for the Bancorp’s commercial products. Each of the
limited partnerships has an unrelated third-party general partner
responsible for appointing the fund manager. The Bancorp has not
been appointed fund manager for any of these private equity funds.
The funds finance primarily all of their activities from the partners’
capital contributions and investment returns. Under the VIE
consolidation guidance still applicable to the funds, the Bancorp has
determined that it is not the primary beneficiary of the funds
because it does not absorb a majority of the funds’ expected losses
or receive a majority of the funds’ expected residual returns.
Therefore, the Bancorp accounts for its investments in these limited
partnerships under the equity method of accounting.
The Bancorp is exposed to losses arising from negative
performance of the underlying investments in the private equity
funds. As a limited partner, the Bancorp’s maximum exposure to
loss is limited to the carrying amounts of the investments plus
unfunded commitments. The carrying amounts of these
investments, which are included in other assets in the Consolidated
Balance Sheets, are included in the previous tables. Also, as of
December 31, 2012 and 2011, the unfunded commitment amounts
to the funds were $121 million and $166 million, respectively. The
Bancorp made capital contributions of $61 million and $48 million
to private equity funds during 2012 and 2011, respectively.
Money Market Funds
Under U.S. GAAP, money market funds are generally not
considered VIEs because they are generally deemed to have
sufficient equity at risk to finance their activities without additional
subordinated financial support, and the fund shareholders do not
lack the characteristics of a controlling interest. However, when a
situation arises where an investment manager provides credit
support to a fund, even when not contractually required to do so,
the investment manager is deemed under U.S. GAAP to have
provided an implicit guarantee of the fund’s performance to the
fund’s shareholders. Such an implicit guarantee would require the
investment manager and other variable interest holders to
reconsider the VIE status of the fund, as well as all other similar
funds where such an implicit guarantee is now deemed to exist.
In the fourth quarter of 2010, the Bancorp voluntarily provided
credit support of less than $1 million to a money market fund
managed by FTAM. Accordingly, the Bancorp was required to
analyze the money market funds and similar funds managed by
FTAM under the VIE consolidation guidance applicable to these
funds to determine the primary beneficiary of each fund. In
analyzing these funds, the Bancorp determined that interest rate risk
and credit risk were the two main risks to which the funds were
exposed. After analyzing the interest rate risk variability and credit
risk variability associated with these funds, the Bancorp determined
that it was not the primary beneficiary of these funds because it did
not absorb a majority of the funds’ expected losses or receive a
majority of the funds’ expected residual returns. Therefore, the
Bancorp’s investments in these funds were included as other
securities in the Bancorp’s Consolidated Balance Sheets. In the third
quarter of 2012, the Bancorp sold certain assets relating to the
management of Fifth Third money market funds. The remaining
maximum exposure as of December 31, 2012 is immaterial to the
Bancorp’s Consolidated Financial Statements.
Loans Provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs
sponsored by third parties. These VIEs are generally established to
finance certain consumer and small business loans originated by
third parties. The entities are primarily funded through the issuance
of a loan from the Bancorp or syndication through which the
Bancorp is involved. The sponsor/administrator of the entities is
responsible for servicing the underlying assets in the VIEs. Because
the sponsor/administrator, not the Bancorp, holds the servicing
responsibilities, which include the establishment and employment of
default mitigation policies and procedures, the Bancorp does not
hold the power to direct the activities most significant to the
economic performance of the entity and, therefore, is not the
primary beneficiary.
The principal risk to which these entities are exposed is credit
risk related to the underlying assets. The Bancorp’s maximum
exposure to loss is equal to the carrying amounts of the loans and
unfunded commitments to the VIEs. The Bancorp’s outstanding
loans to these VIEs, included in commercial loans in the
Consolidated Balance Sheets, are included in the previous tables for
all periods presented. Also, as of December 31, 2012 and 2011, the
Bancorp’s unfunded commitments to these entities were $843
million and $833 million, respectively. The loans and unfunded
commitments to these VIEs are included in the Bancorp’s overall
analysis of the ALLL and reserve for unfunded commitments,
respectively. The Bancorp does not provide any implicit or explicit
liquidity guarantees or principal value guarantees to these VIEs.
Restructured Loans
As part of loan restructuring efforts, the Bancorp received equity
capital from certain borrowers to facilitate the restructuring of the
borrower’s debt. These borrowers meet the definition of a VIE
because the Bancorp was involved in their refinancing and because
their equity capital is insufficient to fund ongoing operations. These
restructurings were intended to provide the VIEs with serviceable
debt levels while providing the Bancorp an opportunity to maximize
the recovery of the loans. The VIEs finance their operations from
earned income, capital contributions, and through restructured debt
agreements. Assets of the VIEs are used to settle their specific
obligations, including loan payments due to the Bancorp. The
Bancorp continues to maintain its relationship with these VIEs as a
lender and minority shareholder, however, it is not involved in
management decisions and does not have sufficient voting rights to
control the membership of the respective boards. Therefore, the
Bancorp accounts for its equity investments in these VIEs under the
equity method or cost method based on its percentage of ownership
and ability to exercise significant influence.
The Bancorp’s maximum exposure to loss as a result of its
involvement with these VIEs is limited to the equity investments,
the principal and accrued interest on the outstanding loans, and any
unfunded commitments. Due to the VIEs’ short-term cash deficit
projections at the restructuring dates, the Bancorp determined that
the initial fair value of its equity investments in these VIEs was zero.
As of December 31, 2012 and 2011, the Bancorp’s carrying value of
these equity investments was immaterial to the Bancorp’s
Consolidated Balance Sheets. Additionally, the Bancorp had
outstanding loans to these VIEs, included in commercial loans in
the Consolidated Balance Sheets, which are included in the previous
tables for all periods presented. The Bancorp had no unfunded loan
commitments to these VIEs as of December 31, 2012 and $2
million at December 31, 2011. The loans and unfunded
commitments to these VIEs are included in the Bancorp’s overall
analysis of the ALLL and reserve for unfunded commitments,
respectively. The Bancorp does not provide any implicit or explicit
liquidity guarantees or principal value guarantees to these VIEs.