Fifth Third Bank 2014 Annual Report Download - page 132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
130 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 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) 2014 2013
Commitments to extend credit $ 63,827 62,050
Letters of credit 3,974 4,129
Forward contracts related to held for sale mortgage loans 999 1,448
Noncancelable operating lease obligations 697 746
Capital commitments for private equity investments 78 90
Purchase obligations 77 84
Capital lease obligations 37 19
Capital expenditures 28 33
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, 2014 and 2013, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $135
million and $162 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
risk rating system utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions) 2014 2013
Pass $ 62,787 61,364
Special mention 660 369
Substandard 380 316
Doubtful - 1
Total $ 63,827 62,050
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, 2014:
($ in millions)
Less than 1 year(a) $ 2,181
1 - 5 years(a) 1,750
Over 5 years 43
Total $ 3,974
(a) Includes $88 and $17 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, 2014 and 2013 and are considered guarantees in
accordance with U.S. GAAP. Approximately 60% and 48% of the
total standby letters of credit were collateralized as of December 31,
2014 and 2013, 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, 2014 and 2013 the reserve related to these standby
letters of credit was $1 million and $2 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.