Fifth Third Bank 2006 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 39
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 an individual
customer default. 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, regular credit examinations and monthly management
reviews of large credit exposures and credits experiencing
deterioration of credit quality. Lending officers with the authority
to extend credit are delegated specific authority amounts, the
utilization of which is closely monitored. Lending activities are
largely decentralized, while the Enterprise Risk Management
division manages the policy and authority delegation process
centrally. The Credit Risk Review function, within the Enterprise
Risk Management division, provides objective assessments of the
quality of underwriting and documentation, the accuracy of risk
grades and the charge-off and reserve analysis process.
The Bancorp’s credit review process and overall assessment of
required allowances is based on ongoing 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. In
addition to the individual review of larger commercial loans that
exhibit probable or observed credit weaknesses, the commercial
credit review process includes the use of two risk grading systems.
The risk grading system currently utilized for reserve analysis
purposes encompasses ten categories. The Bancorp also maintains
a dual risk rating system that provides for thirteen probability of
default grade categories and an additional six grade categories for
estimating actual losses given an event of default. The probability
of default and loss given default evaluations are not separated in
the ten-grade risk rating system. The Bancorp is in the process of
completing significant validation and testing of the dual risk rating
system prior to implementation for reserve analysis purposes. The
dual risk rating system is expected to be consistent with Basel II
expectations and allows for more precision in the analysis of
commercial credit risk. Scoring systems and delinquency
monitoring are used to assess the credit risk in the Bancorp’s
homogenous consumer loan portfolios.
TABLE 25: COMMERCIAL LOAN AND LEASE PORTFOLIO EXPOSURE (a)
2006 2005
As of December 31 ($ in millions) Outstanding Exposure Nonaccrual Outstandin
g
Exposure Nonaccrual
By industry:
Real estate $10,652 13,196 50 9,503 11,689 32
Construction 5,490 8,963 69 4,911 8,094 49
Manufacturing 5,198 11,443 22 4,457 9,975 47
Retail trade 3,655 6,515 27 3,602 5,962 18
Transportation and warehousing 2,097 2,432 4 1,701 1,993 6
Business services 1,862 3,640 16 1,886 3,351 13
Healthcare 1,860 3,208 9 1,664 2,844 10
Wholesale trade 1,827 3,642 11 1,879 3,540 9
Financial services and insurance 1,509 4,855 8 1,111 3,069 1
Individuals 1,364 1,785 13 1,840 2,371 12
Other services 959 1,373 14 945 1,260 9
Accommodation and food 860 1,323 10 997 1,396 9
Public administration 792 930 - 830 1,004 -
Agribusiness 609 782 8 569 752 2
Entertainment and recreation 602 841 2 527 749 3
Other 578 1,269 4 1,041 1,596 3
Communication and information 567 1,073 1 544 1,119 4
Utilities 370 1,187 - 301 1,001 -
Mining 288 637 3 219 419 -
Total $41,139 69,094 271 38,527 62,184 227
By loan size:
Less than $200,000 4 % 3 13 5 4 14
$200,000 to $1 million 16 12 34 19 15 34
$1 million to $5 million 32 27 48 34 28 33
$5 million to $10 million 17 16 5 18 20 8
$10 million to $25 million 21 24 - 18 19 -
Greater than $25 million 10 18 - 6 14 11
Total 100 % 100 100 100 100 100
By state:
Ohio 25 % 28 36 26 29 30
Michigan 22 19 19 22 21 21
Illinois 10 10 8 10 10 8
Florida 10 9 9 10 9 4
Indiana 991510 10 25
Kentucky 66 86 6 6
Tennessee 33 13 2 3
Pennsylvania 12 -1 1 -
Missouri 11 -1 1 -
West Virginia -- -- - 1
Out-of-footprint 13 13 4 11 11 2
Total 100 % 100 100 100 100 100
(a) Outstanding reflects total commercial customer loan and lease balances, including held for sale and net of unearned income, and exposure reflects total commercial customer lending commitments.