Fifth Third Bank 2013 Annual Report Download - page 133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
131 Fifth Third Bancorp
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 significan
t
commitments as of December 31:
($ in millions) 2013 2012
Commitments to extend credit $ 62,050 53,403
Letters of credit 4,129 4,281
Forward contracts related to held for sale mortgage loans 1,448 5,322
Noncancelable lease obligations 746 769
Capital commitments for private equity investments 90 121
Purchase obligations 84 87
Capital expenditures 33 29
Capital lease obligations 19 24
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, 2013 and 2012, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $162
million and $179 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
risk rating system utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions) 2013 2012
Pass $ 61,364 52,812
Special mention 369 370
Substandard 316 221
Doubtful 1 -
Total $ 62,050 53,403
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 as
summarized in the following table expire as of December 31, 2013:
($ in millions)
Less than 1 year(a) $ 1,899
1 - 5 years(a) 2,173
Over 5 years 57
Total $ 4,129
(a) Includes $121 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 97% of total letters of credit
at December 31, 2013 compared to 99% at December 31, 2012 and
are considered guarantees in accordance with U.S. GAAP.
Approximately 48% and 49% of the total standby letters of credit
were fully secured as of December 31, 2013 and 2012, 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, 2013 and 2012 the
reserve related to these standby letters of credit was $2 million and
$4 million, respectively, and is included in the total reserve for
unfunded commitments. The Bancorp monitors the credit risk
associated with letters of credit using the same risk rating system
utilized within its loan and lease portfolio.