Fifth Third Bank 2012 Annual Report Download - page 127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
125 Fifth Third Bancorp
16. 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 signif
i
can
t
commitments as of December 31:
($ in millions) 2012 2011
Commitments to extend credit $ 53,403 47,719
Forward contracts to sell mortgage loans 5,322 5,705
Letters of credit 4,281 4,744
Noncancelable lease obligations 769 851
Capital commitments for private equity investments 121 166
Purchase obligations 87 115
Capital expenditures 29 41
Capital lease obligations 24 26
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, 2012 and 2011, the Bancorp had a reserve for
unfunded commitments totaling $179 million and $181 million,
respectively, included in other liabilities in the Consolidated Balance
Sheets. The Bancorp monitors the credit risk associated with
commitments to extend credit using the same risk rating system
utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions) 2012 2011
Pass $ 52,812 46,825
Special mention 370 480
Substandard 221 403
Doubtful - 11
Total $ 53,403 47,719
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 are included in the summary of
significant commitments table above for all periods presented.
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, 2012:
($ in millions)
Less than 1 year(a) $ 1,831
1 - 5 years(a) 2,407
Over 5 years 43
Total $ 4,281
(a) Includes $60 and $4 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 99% of total letters of credit
at December 31, 2012 compared to 98% at December 31, 2011 and
are considered guarantees in accordance with U.S. GAAP.
Approximately 49% and 54% of the total standby letters of credit
were fully secured as of December 31, 2012 and 2011, 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, 2012 and 2011 the
reserve related to these standby letters of credit was $4 million and
$5 million, respectively, included in other liabilities in the
Consolidated Balance Sheets. The Bancorp monitors the credit risk