Fifth Third Bank 2003 Annual Report Download - page 60

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FIFTH THIRD BANCORP AND SUBSIDIARIES
58
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
compared to $187 million in 2002. Net charge-offs as a percentage
of loans and leases outstanding increased 20 bps to .63% in 2003
from .43% in 2002. The increase was due to higher net charge-offs on
both commercial and consumer loans and leases. Total commercial
net charge-offs were $136 million, compared with $61 million in
2002. The ratio of commercial loan net charge-offs to average loans
outstanding in 2003 was 1.0%, an increase from .52% in 2002. The
increase in commercial loan net charge-offs in 2003 is reflective of
the overall challenging economic landscape and stress existing in
several segments of the economy as well as the overall growth of the
commercial loan portfolio. Incremental charge-off activity was
experienced within the Cincinnati, Chicago, Columbus, Cleveland,
Dayton and Grand Rapids markets with no particular industry
concentration and individual credits ranging in size from $1 million
to $7 million. Total commercial mortgage net charge-offs in 2003
were $7 million, compared with $13 million in 2002. Total
residential mortgage net charge-offs in 2003 were $24 million,
compared with $10 million in 2002. The ratio of residential mortgage
net charge-offs to average loans outstanding in 2003 was .57%, an
increase from .23% in 2002. Total consumer loan net charge-offs in
reserve for credit losses on the Consolidated Balance Sheets. The
amount of loans and leases actually removed as assets from the
Consolidated Balance Sheets is referred to as charge-offs and net
charge-offs include current charge-offs less recoveries in the current
period on previously charged-off assets. The Bancorp’s strategy for
credit risk management includes a combination of conservative
exposure limits significantly below legal lending limits and conservative
underwriting, documentation and collection standards. In addition,
the Bancorp also emphasizes diversification on a geographic, industry
and customer level and performs regular credit examinations and
quarterly management reviews of large credit exposures as well as loans
experiencing deterioration of credit quality. The Bancorp has not
substantively changed any aspect to its overall approach in the
determination of the reserve for loan and lease losses, and there have
been no material changes in assumptions or estimation techniques, as
compared to prior periods that impacted the determination of the
current period allowance. For a detailed discussion regarding factors
considered in the determination of the reserve for credit losses see
Note 1 to the Consolidated Financial Statements.
Net charge-offs increased $125 million to $312 million in 2003,
Table 17–Summary of Credit Loss Experience for the Years Ended December 31
($ in millions) 2003 2002 2001 2000 1999
Losses charged off:
Commercial, financial and agricultural loans . . . . . . . . $(152.7) (80.5) (106.2) (37.4) (53.6)
Real estate - commercial mortgage loans . . . . . . . . . . . (8.6) (17.9) (11.5) (21.6) (17.4)
Real estate - construction loans . . . . . . . . . . . . . . . . . . (3.7) (6.3) (2.2) (1.1) (1.1)
Real estate - residential mortgage loans . . . . . . . . . . . . (23.8) (9.8) (7.2) (2.6) (4.7)
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135.5) (115.3) (116.3) (73.5) (92.2)
Lease financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55.9) (42.7) (65.2) (39.6) (40.3)
Total losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (380.2) (272.5) (308.6) (175.8) (209.3)
Recoveries of losses previously charged off:
Commercial, financial and agricultural loans . . . . . . . . 16.3 19.6 21.6 16.3 14.6
Real estate - commercial mortgage loans . . . . . . . . . . . 2.1 4.5 9.2 9.4 5.0
Real estate - construction loans . . . . . . . . . . . . . . . . . . .5 2.5 .4 .3 —
Real estate - residential mortgage loans . . . . . . . . . . . . .2 .3 .2 .2 .7
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.5 46.6 38.2 31.7 33.8
Lease financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 12.2 11.9 9.2 13.6
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68.0 85.7 81.5 67.1 67.7
Net losses charged off:
Commercial, financial and agricultural loans . . . . . . . . (136.4) (60.9) (84.6) (21.1) (39.0)
Real estate - commercial mortgage loans . . . . . . . . . . . (6.5) (13.4) (2.3) (12.2) (12.4)
Real estate - construction loans . . . . . . . . . . . . . . . . . . (3.2) (3.8) (1.8) (.8) (1.1)
Real estate - residential mortgage loans . . . . . . . . . . . . (23.6) (9.5) (7.0) (2.4) (4.0)
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (96.0) (68.7) (78.1) (41.8) (58.4)
Lease financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46.5) (30.5) (53.3) (30.4) (26.7)
Total net losses charged off . . . . . . . . . . . . . . . . . . . . . . $(312.2) (186.8) (227.1) (108.7) (141.6)
Reserve for credit losses, January 1 . . . . . . . . . . . . . . . . . $(683.2 624.1 609.3 572.9 532.2
Net losses charged off . . . . . . . . . . . . . . . . . . . . . . . . . . (312.2) (186.8) (227.1) (108.7) (141.6)
Reserve of acquired institutions and other. . . . . . . . . . . . —(.7) 5.9 7.4 12.9
Provision charged to operations . . . . . . . . . . . . . . . . . . . 399.4 246.6 200.6 125.7 143.2
Merger-related provision . . . . . . . . . . . . . . . . . . . . . . . . —— 35.4 12.0 26.2
Reserve for credit losses, December 31 . . . . . . . . . . . . . . $(770.4 683.2 624.1 609.3 572.9
Loans and leases outstanding at December 31 (a) . . . . . . $52,308 45,928 41,548 42,530 38,837
Average loans and leases (a) . . . . . . . . . . . . . . . . . . . . . . $49,700 43,529 42,339 41,303 36,543
Reserve as a percent of loans and leases outstanding . . . . 1.47% 1.49 1.50 1.43 1.48
Net charge-offs as a percent of average loans and leases . . .63% .43 .54 .26 .39
Reserve as a percent of total nonperforming assets. . . . . . 242.01% 250.62 265.45 303.85 370.86
Reserve as a percent of total underperforming assets . . . . 166.19% 157.12 156.49 185.21 241.16
(a) Average loans and leases exclude loans held for sale.