Fifth Third Bank 2007 Annual Report Download - page 45

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 4
3
loans increased to 83 bp in 2007 compared to 60 bp in 2006
displaying an expected increase due to a shift in the portfolio to a
higher percentage of used automobiles and an increase in loss of
severity due to a market surplus of used automobiles. The net
charge-off ratio on credit card balances modestly declined
compared to the prior year primarily due to a large origination of
card balances in 2007. Although the credit characteristics of the
credit card portfolio have been maintained during the origination
of new cards, including the weighted average FICO and average
line outstanding, the Bancorp does expect the charge-off ratio to
increase as the portfolio matures. The Bancorp employs a risk-
adjusted pricing methodology to ensure adequate compensation is
received for those products that have higher credit costs.
Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for
loan and lease losses and the reserve for unfunded commitments.
The allowance for loan and lease losses provides coverage for
probable and estimable losses in the loan and lease portfolio. The
Bancorp evaluates the allowance each quarter to determine its
adequacy to cover inherent losses. Several factors are taken into
consideration in the determination of the overall allowance for loan
and lease losses, including the unallocated component. These
factors include, but are not limited to, the overall risk profile of the
loan and lease portfolios, net charge-off experience, the extent of
impaired loans and leases, the level of nonaccrual loans and leases,
the level of 90 days past due loans and leases and the overall
percentage level of the allowance for loan and lease losses. The
Bancorp also considers overall asset quality trends, credit
administration and portfolio management practices, risk
identification practices, credit policy and underwriting practices,
overall portfolio growth, portfolio concentrations and current
national and local economic conditions that might impact the
portfolio.
In 2007, the Bancorp has not substantively changed any
material aspect to its overall approach in the determination of the
allowance for loan and lease losses and there have been no material
changes in criteria or estimation techniques as compared to prior
periods that impacted the determination of the current period
allowance. In addition to the allowance for loan and lease losses,
the Bancorp maintains a reserve for unfunded commitments. The
methodology used to determine the adequacy of this reserve is
similar to the Bancorp’s methodology for determining the
allowance for loan and lease losses. The provision for unfunded
commitments is included in other noninterest expense on the
Consolidated Statements of Income. Table 33 shows the changes
in the allowance for credit losses during 2007.
TABLE 32: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions) 2007 2006 2005 2004 2003
Losses charged off:
Commercial loans $(121) (131) (99) (95) (153)
Commercial mortgage loans (46) (27) (13) (14) (9)
Commercial construction loans (29) (7) (5) (7) (4)
Commercial leases (1) (4) (38) (8) (24)
Residential mortgage loans (43) (23) (19) (15) (24)
Home equity (106) (65) (60) (52) (52)
Automobile loans (117) (87) (63) (56) (41)
Credit card (54) (36) (46) (35) (31)
Other consumer loans and leases (27) (28) (30) (39) (42)
Total losses (544) (408) (373) (321) (380)
Recoveries of losses previously charged off:
Commercial loans 12 24 24 14 16
Commercial mortgage loans 233 52
Commercial construction loans --1 - -
Commercial leases 151 12
Residential mortgage loans --- --
Home equity 99 10 10 15
Automobile loans 32 30 18 18 12
Credit card 855 65
Other consumer loans and leases 18 16 12 15 16
Total recoveries 82 92 74 69 68
Net losses charged off:
Commercial loans (109) (107) (75) (81) (137)
Commercial mortgage loans (44) (24) (10) (9) (7)
Commercial construction loans (29) (7) (4) (7) (4)
Commercial leases -1 (37) (7) (22)
Residential mortgage loans (43) (23) (19) (15) (24)
Home equity (97) (56) (50) (42) (37)
Automobile loans (85) (57) (45) (38) (29)
Credit card (46) (31) (41) (29) (26)
Other consumer loans and leases (9) (12) (18) (24) (26)
Total net losses charged off $(462) (316) (299) (252) (312)
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial loans .49 % .53 .41 .54 1.00
Commercial mortgage loans .40 .25 .10 .12 .10
Commercial construction loans .51 .11 .08 .17 .10
Commercial leases .01 (.03) 1.06 .21 .72
Total commercial loans and leases .43 .34 .35 .35 .64
Residential mortgage loans .48 .27 .23 .25 .53
Home equity .82 .46 .44 .44 .43
Automobile loans .83 .60 .53 .48 .40
Credit card 3.55 3.65 5.65 3.92 4.70
Other consumer loans and leases .83 .91 1.06 .98 1.06
Total consumer loans and leases .84 .55 .57 .56 .61
Total net losses charged of
f
.61 % .44 .45 .45 .63