Fifth Third Bank 2003 Annual Report Download - page 61

FIFTH THIRD BANCORP AND SUBSIDIARIES
59
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
reflective of growth in the portfolio, particularly in the Cincinnati,
Chicago, Indianapolis, Grand Rapids and Detroit markets with the
overall increase as a percent of loans and leases reflective of recent
increasing charge-off experience. The reserve established for consumer
loans increased $15 million to $156 million in 2003. The increase
reflects the growth in the overall portfolio achieved through the
sales success of the Bancorp’s direct installment loan campaigns,
while the reserve as a percent of loans and leases has remained relatively
steady. The reserve for lease financing decreased $68 million to $64
million in 2003 attributable, in large part, to specific airline lease
charge-off's in 2003 along with recent stability and an overall
improving outlook for the commercial leasing portfolio. The reserve
established for commercial mortgage decreased $40 million to $77
million in 2003. The decrease in the reserve is largely reflective of
improvement in credit experience realized in 2003 and the outlook
as lower interest rates and subsequent prepayment activity led to an
increased ability to exit certain acquired commercial mortgage credit
exposures. An unallocated reserve is maintained to recognize the
imprecision in estimating and measuring loss when evaluating
reserves for individual loans or pools of loans. The unallocated
reserve was $113 million at December 31, 2003 or .22% of total
loans and leases outstanding.
Deposits
Commercial customer additions and net new retail checking account
growth fueled another year of strong deposit growth across all of the
Bancorp’s regional markets. Total deposits increased 9%, or $4.9
billion over 2002 due to a $3.4 billion, or 9% percent, increase in
transaction deposit accounts and a $3.0 billion, or 60%, growth in
certificates over $100,000 and foreign office deposits utilized to fund
asset growth in 2003, offset by an 18%, or $1.5 billion decrease in
consumer time deposits. Total average deposits increased 11%, or $5.6
billion over 2002 due to a $4.6 billion, or 13%, increase in average
transaction deposit accounts and a $3.2 billion, or 88%, growth in
average certificates over $100,000 and average foreign office deposits,
offset by a 24%, or $2.2 billion decrease in average consumer time
deposits. The transaction account deposit growth during the current
year is primarily attributable to the Bancorp’s competitive deposit
products and a continuing focus on expanding its customer base
through the overall success of campaigns emphasizing customer
deposit accounts. Average interest checking and demand deposit
balances rose 15% and 17%, respectively, from 2002 average levels.
Overall, the Bancorp experienced deposit growth in many of its
markets, with significant contributions from the Cincinnati,
Indianapolis, Chicago, Columbus and Florida markets, due to the
popularity of existing products, such as Totally Free Checking,
Platinum One Checking, MaxSaver, Business 53 Checking, the e53
2003 were $96 million, compared with $69 million in 2002. The
ratio of consumer loan net charge-offs to average loans in 2003 was
.58%, an increase from .49% in 2002. The increase in consumer
loan and residential mortgage net charge-offs as compared to the
prior year reflects general trends in the national economy as it relates
to unemployment and personal bankruptcies. Total lease net charge-
offs in 2003 were $47 million, compared with $31 million in 2002.
The ratio of lease net charge-offs to average leases outstanding in
2003 was .84%, compared with .65% in 2002. The increase in lease
net charge-offs in 2003 was largely attributable to $28 million in net
charge-offs relating to three airline leases. The following table
illustrates net charge-offs as a percentage of average loans and leases
outstanding by loan category for the years ended December 31:
Table 19–Net Charge-offs as a Percentage of
Average Loans and Leases Outstanding
2003 2002 2001 2000 1999
Commercial, financial
and agricultural loans
. . 1.00% .52 .79 .20 .41
Real estate – commercial
mortgage loans
. . . . . . .10% .23 .04 .21 .25
Real estate –
construction loans . . . .
.09% .12 .06 .03 .05
Real estate – residential
mortgage loans
. . . . . . .57% .23 .14 .04 .05
Consumer loans . . . . . . .58% .49 .65 .41 .72
Lease financing . . . . . . . .84% .65 1.13 .58 .58
Weighted-Average Ratio . . .63% .43 .54 .26 .39
The reserve for credit losses totaled $770 million at December 31,
2003 and $683 million at December 31, 2002. The reserve for credit
losses at December 31, 2003 was 1.47% of the total loan and lease
portfolio compared to 1.49% at December 31, 2002. An analysis of the
changes in the reserve for credit losses, including charge-offs, recoveries
and provision is presented in Table 17. The increase in the reserve for
credit losses in the current year compared to 2002 is primarily due
to the overall increase in the total loan and lease portfolio, the
increase in nonperforming and underperforming assets at December
31, 2003 as compared to December 31, 2002 and the overall assessed
probable estimated loan and lease losses inherent in the portfolio. The
total reserve for credit losses as a percent of nonperforming assets
was 242% at December 31, 2003, compared with 250.6% at
December 31, 2002. The total reserve for credit losses as a percent of
underperforming assets was 166.2% at December 31, 2003,
compared with 157.1% at December 31, 2002. Table 18 above
provides the amount of the reserve for credit losses by loan and lease
category. The reserve established for commercial loans increased
$134 million to $293 million in 2003. The increase is largely
Table 18–Elements of the Reserve for Credit Losses at December 31
Reserve as a Percent of
Reserve Amount Loans and Leases
($ in millions) 2003 2002 2001 2000 1999 2003 2002 2001 2000 1999
Commercial, financial and agricultural loans . . . . $292.6 158.5 117.9 106.8 121.0 2.06% 1.24 1.09 1.00 1.22
Real estate – commercial mortgage loans . . . . . . . 77.2 116.7 102.6 102.8 122.8 1.12 1.98 1.69 1.65 2.18
Real estate – construction loans . . . . . . . . . . . . . . 38.0 41.4 32.5 27.9 20.2 1.05 1.24 .97 .87 .89
Real estate – residential mortgage loans . . . . . . . . 29.0 43.4 31.1 17.7 24.5 .66 1.24 .69 .31 .37
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . 156.3 141.3 131.6 134.2 126.8 .90 .93 1.05 1.16 1.40
Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . 64.1 131.8 100.7 113.3 82.1 1.12 2.46 2.38 2.17 1.55
Unallocated reserve . . . . . . . . . . . . . . . . . . . . . . . 113.2 50.1 107.7 106.6 75.5 .22 .11 .26 .25 .19
Total reserve for credit losses . . . . . . . . . . . . . . . . $770.4 683.2 624.1 609.3 572.9 1.47% 1.49 1.50 1.43 1.48