Fifth Third Bank 2006 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp
40
Portfolio Diversity
The Bancorp’s credit risk management strategy includes
minimizing concentrations of risk through diversification. Table
25 provides breakouts of the commercial loan and lease portfolio,
including held for sale, by major industry classification, by loan size
and by state, illustrating the diversity and granularity of the
Bancorp’s portfolio.
The commercial portfolio is characterized by 87% of
outstanding balances and exposures concentrated within the
Bancorp’s primary market areas of Ohio, Kentucky, Indiana,
Michigan, Illinois, Florida, Tennessee, West Virginia, Missouri and
Pennsylvania. Exclusive of a national large-ticket leasing business,
the commercial portfolio is characterized by 94% of outstanding
balances and 91% of exposures concentrated within these ten
states. The mortgage and construction segments of the
commercial portfolio are characterized by 97% of outstanding
balances and 96% of exposures concentrated within these ten
states.
Analysis of Nonperforming Assets
Nonperforming assets include: (i) nonaccrual loans and leases for
which ultimate collectibility of the full amount of the principal
and/or interest is uncertain; (ii) loans and leases that have been
renegotiated to provide for a reduction or deferral of interest or
principal because of deterioration in the financial position of the
borrower and (iii) other assets, including other real estate owned
and repossessed equipment. Loans are placed on nonaccrual status
when the principal or interest is past due 90 days or more (unless
the loan is both well secured and in process of collection) and
payment of the full principal and/or interest under the contractual
terms of the loan are not expected. Additionally, loans are placed
on nonaccrual status upon deterioration of the financial condition
of the borrower. When a loan is placed on nonaccrual status, the
accrual of interest, amortization of loan premium, accretion of loan
discount and amortization or accretion of deferred net loan fees or
costs are discontinued and previously accrued but unpaid interest is
reversed. Commercial loans on nonaccrual status are reviewed for
impairment at least quarterly. If the principal or a portion of
principal is deemed a loss, the loss amount is charged off to the
allowance for loan and lease losses.
Total nonperforming assets were $455 million at December
31, 2006, an increase of $94 million compared to $361 million at
December 31, 2005. Nonperforming assets remain a small
percentage of total loans, leases and other assets, including other
real estate owned at .61% as of December 31, 2006, compared to
.52% as of December 31, 2005.
Commercial nonaccrual credits as a percent of commercial
loans increased from .59% in 2005 to .66% in 2006 primarily due
to increases in the Indianapolis and Cleveland markets offset by a
decrease in the Cincinnati market. Consumer nonaccrual loans as a
percent of loans increased slightly from .20% in 2005 to .24% in
2006. Overall, nonaccrual loans continue to represent a small
portion of the portfolio at just .47% as of December 31, 2006,
compared to .41% as of December 31, 2005.
Total loans and leases 90 days past due have increased from
$155 million as of December 31, 2005 to $210 million as of
December 31, 2006. The $55 million increase from the prior year
was evenly distributed between commercial and consumer loans
and leases.
At December 31, 2006, there were $24 million of loans and
leases currently performing in accordance with contractual terms,
but for which there were serious doubts as to the ability of the
borrower to comply with such terms. For the years 2006 and 2005,
interest income of $10 million and $8 million, respectively, was
recorded on nonaccrual and renegotiated loans and leases. For the
years ended 2006 and 2005, additional interest income of $85
million and $53 million, respectively, would have been recorded if
the nonaccrual and renegotiated loans and leases had been current
in accordance with the original terms.
Analysis of Net Loan Charge-offs
Net charge-offs as a percent of average loans and leases were 44 bp
for 2006, compared to 45 bp for 2005. The ratio of commercial
loan net charge-offs to average commercial loans outstanding
increased to 53 bp in 2006 compared to 41 bp in 2005 due to
increases in net charge-offs in the Indianapolis and Southern
Indiana markets, partially offset by a decrease in the Cincinnati
market. The net charge-off ratio for commercial mortgage loans
increased 15 bp due to increased net charge-offs in the
Indianapolis, Chicago and Cleveland markets. The net charge-off
ratio for commercial lease financing decreased 109 bp in 2006.
The comparison to prior year is impacted by approximately $27
million in charge-offs related to bankrupt commercial airline
carriers during 2005. Consumer lease financing net losses charged
off decreased to $5 million as a result of decreased net charge-offs
in nearly all affiliate markets and lower averages balances. Overall,
the level of net charge-offs remains a small percentage of the total
loan and lease portfolio. The Bancorp expects net charge-offs to
be in the low to mid 50 bp range in 2007. Table 27 provides a
summary of credit loss experience and net charge-offs as a
TABLE 26: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions) 2006 2005 2004 2003 2002
Commercial loans and leases $133 145 110 129 159
Commercial mortgages 84 51 51 42 41
Commercial construction 54 31 13 19 14
Residential mortgages and construction 38 30 24 25 18
Consumer loans and leases 43 37 30 27 15
Total nonaccrual loans and leases 352 294 228 242 247
Renegotiated loans and leases --1 8 -
Other assets, including other real estate owned 103 67 74 69 26
Total nonperforming assets $455 361 303 319 273
Commercial loans and leases $40 21 22 15 29
Commercial mortgages and construction 23 14 13 12 18
Credit card receivables 16 10 13 13 9
Residential mortgages and construction (a) 68 53 43 51 60
Consumer loans and leases 63 57 51 54 46
Total 90 days past due loans and leases $210 155 142 145 162
Nonperforming assets as a percent of total loans, leases and other assets,
including other real estate owned .61 % .52 .51 .61 .59
Allowance for loan and lease losses as a percent of nonperforming assets (b) 170 206 235 219 251
(a) Information for all periods presented excludes advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are
insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2006, 2005 and 2004, these advances were $14 million, $13
million and $23 million, respectively. Information prior to December 31, 2004 was not available.
(b) At December 31, 2004, the reserve for unfunded commitments was reclassified from the allowance for loan and lease losses to other liabilities. The 2003 year-end reserve for unfunded
commitments has been reclassified to conform to the current year presentation.