Fifth Third Bank 2013 Annual Report Download - page 77

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
75 Fifth Third Bancorp
TABLE 54: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
A
s of December 31 ($ in millions) 2013 2012 2011 2010 2009
A
llowance attributed to:
Commercial and industrial loans $ 767 802 929 1,123 1,282
Commercial mortgage loans 212 333 441 597 734
Commercial construction loans 26 33 77 158 380
Commercial leases 53 68 80 111 121
Residential mortgage loans 189 229 227 310 375
Home equity 94 143 195 265 294
A
utomobile loans 23 28 43 73 127
Credit card 92 87 106 158 199
Other consumer loans and leases 16 20 21 59 44
Unallocated 110 111 136 150 193
Total ALLL $ 1,582 1,854 2,255 3,004 3,749
Portfolio loans and leases:
Commercial and industrial loans $ 39,316 36,038 30,783 27,191 25,683
Commercial mortgage loans 8,066 9,103 10,138 10,845 11,803
Commercial construction loans 1,039 698 1,020 2,048 3,784
Commercial leases 3,625 3,549 3,531 3,378 3,535
Residential mortgage loans 12,680 12,017 10,672 8,956 8,035
Home equity 9,246 10,018 10,719 11,513 12,174
A
utomobile loans 11,984 11,972 11,827 10,983 8,995
Credit card 2,294 2,097 1,978 1,896 1,990
Other consumer loans and leases 364 290 350 681 780
Total portfolio loans and leases $ 88,614 85,782 81,018 77,491 76,779
A
ttributed allowance as a percent of respective portfolio loans and leases:
Commercial and industrial loans 1.95 % 2.23 3.02 4.13 4.99
Commercial mortgage loans 2.63 3.66 4.35 5.50 6.22
Commercial construction loans 2.50 4.73 7.55 7.71 10.04
Commercial leases 1.46 1.92 2.27 3.29 3.42
Residential mortgage loans 1.49 1.91 2.13 3.46 4.67
Home equity 1.02 1.43 1.82 2.30 2.41
A
utomobile loans 0.19 0.23 0.36 0.66 1.41
Credit card 4.01 4.15 5.36 8.33 10.00
Other consumer loans and leases 4.40 6.90 6.00 8.66 5.64
Unallocated (as a percent of total portfolio loans and leases) 0.12 0.13 0.17 0.19 0.25
Total portfolio loans and leases 1.79 % 2.16 2.78 3.88 4.88
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.
Interest Rate Risk Management Oversight
The Bancorp’s Executive ALCO, which includes senior
management representatives and is accountable to the ERM
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. In 2012, the NII and EVE ALCO policy limits were
lowered to reflect the Bancorp’s current risk appetite and due to
significant uncertainty with respect to the economic environment,
market interest rates and balance sheet and deposit pricing
behaviors. The policy limits were updated in conjunction with the
Market Risk Management group and were approved by ALCO.
Net Interest Income Sensitivity
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 assets, liabilities and off-balance sheet exposures and
incorporates market-based assumptions regarding the effect of
changing interest rates on the prepayment rates of certain assets and
attrition rates for certain 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