Fifth Third Bank 2011 Annual Report Download - page 69

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 67
TABLE 50: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND
LEASES
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s of December 31 ($ in millions) 2011 2010 2009 2008 2007
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llowance attributed to:
Commercial and industrial loans $ 929 1,123 1,282 824 271
Commercial mortgage loans 441 597 734 363 135
Commercial construction loans 77 158 380 252 98
Commercial leases 80 111 121 61 27
Residential mortgage loans 227 310 375 388 67
Home equity 195 265 294 289 124
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utomobile loans 43 73 127 150 79
Credit card 106 158 199 148 69
Other consumer loans and leases 21 59 44 33 20
Unallocated 136 150 193 279 47
Total ALLL $ 2,255 3,004 3,749 2,787 937
Portfolio loans and leases:
Commercial and industrial loans $ 30,783 27,191 25,683 29,197 24,813
Commercial mortgage loans 10,138 10,845 11,803 12,502 11,862
Commercial construction loans 1,020 2,048 3,784 5,114 5,561
Commercial leases 3,531 3,378 3,535 3,666 3,737
Residential mortgage loans 10,672 8,956 8,035 9,385 10,540
Home equity 10,719 11,513 12,174 12,752 11,874
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utomobile loans 11,827 10,983 8,995 8,594 9,201
Credit card 1,978 1,896 1,990 1,811 1,591
Other consumer loans and leases 350 681 780 1,122 1,074
Total portfolio loans and leases $ 81,018 77,491 76,779 84,143 80,253
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ttributed allowance as a percent of respective portfolio loans and leases:
Commercial and industrial loans 3.02 % 4.13 4.99 2.82 1.09
Commercial mortgage loans 4.35 5.50 6.22 2.90 1.14
Commercial construction loans 7.55 7.71 10.04 4.93 1.77
Commercial leases 2.27 3.29 3.42 1.66 0.72
Residential mortgage loans 2.13 3.46 4.67 4.13 0.63
Home equity 1.82 2.30 2.41 2.27 1.04
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utomobile loans 0.36 0.66 1.41 1.75 0.86
Credit card 5.36 8.33 10.00 8.17 4.34
Other consumer loans and leases 6.00 8.66 5.64 2.94 1.86
Unallocated (as a percent of total portfolio loans and leases) 0.17 0.19 0.25 0.33 0.06
Total portfolio loans and leases 2.78 % 3.88 4.88 3.31 1.17
MARKET RISK MANAGEMENT
Market risk arises from the potential for market fluctuations in
interest rates, foreign exchange rates and equity prices that may
result in potential reductions in net income. Interest rate risk, a
component of market risk, is the exposure to adverse changes in net
interest income or financial position due to changes in interest rates.
Management considers interest rate risk a prominent market risk in
terms of its potential impact on earnings. Interest rate risk can occur
for any one or more of the following reasons:
 Assets and liabilities may mature or reprice at different times;
 Short-term and long-term market interest rates may change
by different amounts; or
 The expected maturity of various assets or liabilities may
shorten or lengthen as interest rates change.
In addition to the direct impact of interest rate changes on net
interest income, interest rates can indirectly impact earnings through
their effect on loan demand, credit losses, mortgage originations, the
value of servicing rights and other sources of the Bancorp’s
earnings. Stability of the Bancorp’s net income is largely dependent
upon the effective management of interest rate risk. Management
continually reviews the Bancorp’s balance sheet composition and
earnings flows and models the interest rate risk, and possible actions
to reduce this risk, given numerous possible future interest rate
scenarios.
Net Interest Income Simulation Model
The Bancorp utilizes a variety of measurement techniques to
identify and manage its interest rate risk, including the use of an NII
simulation model to analyze the sensitivity of net interest income to
changing interest rates. The model is based on contractual and
assumed cash flows and repricing characteristics for all of the
Bancorp’s financial instruments and incorporates market-based
assumptions regarding the effect of changing interest rates on the
prepayment rates of certain assets and liabilities. The model also
includes senior management’s projections of the future volume and
pricing of each of the product lines offered by the Bancorp as well
as other pertinent assumptions. Actual results may differ from these
simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and
management strategies.
The Bancorp’s Executive ALCO, which includes senior
management representatives and is accountable to the Enterprise
Risk Management Committee, monitors and manages interest rate
risk within Board approved policy limits. In addition to the risk
management activities of ALCO, the Bancorp has a Market Risk
Management function as part of ERM that provides independent
oversight of market risk activities. The Bancorp’s interest rate risk
exposure is currently evaluated by measuring the anticipated change
in net interest income over 12-month and 24-month horizons
assuming a 100 bps parallel ramped increase and a 200 bps parallel
ramped increase in interest rates. The Fed Funds interest rate,
targeted by the Federal Reserve at a range of 0% to 0.25%, is
currently set at a level that would be negative in parallel ramped