Fifth Third Bank 2014 Annual Report Download - page 60

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
58 Fifth Third Bancorp
Committee, the Asset/Liability Committee and the Enterprise
Marketing Committee. Other committees accountable to the ERMC
oversee the ALLL, capital and CRA/fair lending functions. In
addition, the Legal and Regulatory Reserve Committee, which is
accountable to the Operational Risk Committee, reviews and
monitors significant legal and regulatory matters to ensure that
reserves for potential litigation losses are established when such
losses are both probable and subject to reasonable estimation. There
are also new products and initiatives processes applicable to every
line of business to ensure an appropriate standard readiness
assessment is performed before launching a new product or
initiative. Significant risk policies approved by the management
governance committees are also reviewed and approved by the Risk
and Compliance Committee of the Board of Directors.
Credit Risk Review is an independent function responsible for
evaluating the sufficiency of underwriting, documentation and
approval processes for consumer and commercial credits, the
accuracy of risk grades assigned to commercial credit exposure,
nonaccrual status, specific reserves and monitoring for charge-offs.
Credit Risk Review reports directly to the Risk and Compliance
Committee of the Board of Directors and administratively to the
Chief Auditor.
The Bancorp conducts regular reviews of the business it serves
based on the changing competitive and regulatory environment.
Based on the most recent review, the Bancorp exited the Residential
Wholesale Loan Broker business during the first quarter of 2014.
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy is to
quantify and manage credit risk on an aggregate portfolio basis, as
well as to limit the risk of loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual
obligations to the Bancorp. The Bancorp's credit risk management
strategy is based on three core principles: conservatism,
diversification and monitoring. The Bancorp believes that effective
credit risk management begins with conservative lending practices.
These practices include conservative exposure and counterparty
limits and conservative underwriting, documentation and collection
standards. The Bancorp's credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as ongoing portfolio monitoring and timely
management reviews of large credit exposures and credits
experiencing deterioration of credit quality. Credit officers with the
authority to extend credit are delegated specific authority amounts,
the utilization of which is closely monitored. Underwriting activities
are centrally managed, and ERM manages the policy and the
authority delegation process directly. The Credit Risk Review
function provides objective assessments of the quality of
underwriting and documentation, the accuracy of risk grades and
the charge-off, nonaccrual and reserve analysis process. The
Bancorp’s credit review process and overall assessment of the
adequacy of the allowance for credit losses is based on quarterly
assessments of the probable estimated losses inherent in the loan
and lease portfolio. The Bancorp uses these assessments to
promptly identify potential problem loans or leases within the
portfolio, maintain an adequate reserve and take any necessary
charge-offs. The Bancorp defines potential problem loans and
leases as those rated substandard that do not meet the definition of
a nonperforming asset or a restructured loan. Refer to Note 6 of
the Notes to Consolidated Financial Statements for further
information on the Bancorp’s credit grade categories, which are
derived from standard regulatory rating definitions.
The following tables provide a summary of potential problem loans and leases as of December 31:
TABLE 32: POTENTIAL PROBLEM LOANS AND LEASES
Unpaid
Carrying Principal
2014 ($ in millions) Value Balance Exposure
Commercial and industrial $ 1,022 1,028 1,344
Commercial mortgage 272 273 273
Commercial construction 7 7 11
Commercial leases 29 29 29
Total $ 1,330 1,337 1,657
TABLE 33: POTENTIAL PROBLEM LOANS AND LEASES
Unpaid
Carrying Principal
2013 ($ in millions) Value Balance Exposure
Commercial and industrial $ 1,032 1,034 1,323
Commercial mortgage 517 520 520
Commercial construction 44 44 50
Commercial leases 18 18 18
Total $ 1,611 1,616 1,911