Fifth Third Bank 2013 Annual Report Download - page 79

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
77 Fifth Third Bancorp
actions that management may undertake to manage risk in response
to anticipated changes in interest rates.
The Bancorp regularly evaluates its exposures to LIBOR and
Prime basis risks, nonparallel shifts in the yield curve and embedded
options risk. In addition, the impact on NII and EVE of more
extreme changes in interest rates is modeled, wherein the Bancorp
employs the use of yield curve shocks and environment-specific
scenarios.
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorp’s interest rate risk
management strategy is its use of derivative instruments to minimize
significant fluctuations in earnings caused by changes in market
interest rates. Examples of derivative instruments that the Bancorp
may use as part of its interest rate risk management strategy include
interest rate swaps, interest rate floors, interest rate caps, forward
contracts, options, swaptions and TBA securities.
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp enters into forward
contracts accounted for as free-standing derivatives to economically
hedge interest rate lock commitments that are also considered free-
standing derivatives. Additionally, the Bancorp economically hedges
its exposure to mortgage loans held for sale through the use of
forward contracts and mortgage options.
The Bancorp also establishes derivative contracts with major
financial institutions to economically hedge significant exposures
assumed in commercial customer accommodation derivative
contracts. Generally, these contracts have similar terms in order to
protect the Bancorp from market volatility. Credit risk arises from
the possible inability of counterparties to meet the terms of their
contracts, which the Bancorp minimizes through collateral
arrangements, approvals, limits and monitoring procedures. For
further information including the notional amount and fair values of
these derivatives, see Note 12 of the Notes to Consolidated
Financial Statements.
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s portfolio loans and leases contain both
fixed and floating/adjustable rate products, the rates of interest
earned by the Bancorp on the outstanding balances are generally
established for a period of time. The interest rate sensitivity of loans
and leases is directly related to the length of time the rate earned is
established. The following table summarizes the expected principal
cash flows of the Bancorp’s portfolio loans and leases as of
December 31, 2013.

TABLE 57: PORTFOLIO LOAN AND LEASE EXPECTED MATURITIES
($ in millions) Less than 1 year 1-5 years Over 5 years Total
Commercial and industrial loans $ 18,523 19,785 1,008 39,316
Commercial mortgage loans 3,569 4,054 443 8,066
Commercial construction loans 457 557 25 1,039
Commercial leases 669 1,608 1,348 3,625
Subtotal - commercial loans and leases 23,218 26,004 2,824 52,046
Residential mortgage loans 2,160 4,298 6,222 12,680
Home equity 1,352 5,088 2,806 9,246
Automobile loans 4,684 7,104 196 11,984
Credit card 661 1,633 - 2,294
Other consumer loans and leases 312 51 1 364
Subtotal - consumer loans and leases 9,169 18,174 9,225 36,568
Total $ 32,387 44,178 12,049 88,614
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dditionally, the following table displays a summary of expected principal cash flows occurring after one year for both fixed and floating or
adjustable rate loans, as of December 31, 2013:
TABLE 58: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURING AFTER ONE YEAR
Interest Rate
($ in millions) Fixed Floating or Adjustable
Commercial and industrial loans $ 2,839 17,954
Commercial mortgage loans 1,167 3,330
Commercial construction loans 27 555
Commercial leases 2,956 -
Subtotal - commercial loans and leases 6,989 21,839
Residential mortgage loans 7,682 2,838
Home equity 951 6,943
Automobile loans 7,252 48
Credit card 694 939
Other consumer loans and leases 35 17
Subtotal - consumer loans and leases 16,614 10,785
Total $ 23,603 32,624
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $967
million and $697 million as of December 31, 2013 and 2012,
respectively. The value of servicing rights can fluctuate sharply
depending on changes in interest rates and other factors. Generally,
as interest rates decline and loans are prepaid to take advantage of
refinancing, the total value of existing servicing rights declines
because no further servicing fees are collected on repaid loans. The
Bancorp maintains a non-qualifying hedging strategy relative to its
mortgage banking activity in order to manage a portion of the risk