Fifth Third Bank 2014 Annual Report Download - page 77

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
75 Fifth Third Bancorp
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 IRLCs 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, refer to 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 cash flows
of the carrying value of the Bancorp’s portfolio loans and leases as
of December 31, 2014:
TABLE 58: PORTFOLIO LOANS AND LEASES EXPECTED MATURITIES
($ in millions) Less than 1 year 1-5 years Over 5 years Total
Commercial and industrial loans $ 23,653 16,371 741 40,765
Commercial mortgage loans 3,328 3,613 458 7,399
Commercial construction loans 847 1,183 39 2,069
Commercial leases 735 1,623 1,362 3,720
Subtotal - commercial loans and leases 28,563 22,790 2,600 53,953
Residential mortgage loans 2,497 5,428 4,464 12,389
Home equity 1,203 3,460 4,223 8,886
Automobile loans 5,209 6,704 124 12,037
Credit card 481 1,920 - 2,401
Other consumer loans and leases 404 14 - 418
Subtotal - consumer loans and leases 9,794 17,526 8,811 36,131
Total $ 38,357 40,316 11,411 90,084
A
dditionally, the following table displays a summary of expected cash flows, excluding interest receivable, occurring after one year for both fixed
and floating/adjustable rate loans and leases, as of December 31, 2014:
TABLE 59: PORTFOLIO LOANS AND LEASES PRINCIPAL CASH FLOWS OCCURING AFTER ONE YEAR
Interest Rate
($ in millions) Fixed Floating or Adjustable
Commercial and industrial loans $ 2,672 14,440
Commercial mortgage loans 1,031 3,040
Commercial construction loans 31 1,191
Commercial leases 2,985 -
Subtotal - commercial loans and leases 6,719 18,671
Residential mortgage loans 7,031 2,861
Home equity 736 6,947
Automobile loans 6,783 45
Credit card 627 1,293
Other consumer loans and leases - 14
Subtotal - consumer loans and leases 15,177 11,160
Total $ 21,896 29,831
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $856
million and $967 million as of December 31, 2014 and 2013,
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
associated with changes in the value of its MSR portfolio as a result
of changing interest rates.
Mortgage rates decreased during the year ended December 31,
2014 which caused actual prepayments on the servicing portfolio to
increase. The increase in actual prepayments on the servicing
portfolio during the year ended December 31, 2014 caused the
modeled prepayment speeds to increase, which led to a temporary
impairment of $65 million on servicing rights during the year ended
December 31, 2014. Mortgage rates increased during the year ended
December 31, 2013 which caused actual prepayments on the
servicing portfolio to decrease. The decrease in actual prepayments
on the servicing portfolio during the year ended December 31, 2013
caused the modeled prepayment speeds to decrease, which led to a
recovery of temporary impairment of $192 million on servicing
rights during the year ended December 31, 2013.
Servicing rights are deemed temporarily impaired when a
borrower’s loan rate is distinctly higher than prevailing rates.
Temporary impairment on servicing rights is reversed when the